The Bank of England's Monetary Policy Committee (MPC) is widely anticipated to keep the base interest rate at 3.75 per cent later this week. This decision comes as policymakers carefully assess the long-term implications of a recently announced peace agreement between the US and Iran, particularly its effect on global energy markets and UK inflation.
Despite the positive news of a peace deal, which saw short-term gilt yields decrease by just over six basis points – suggesting investor optimism that future rate rises might be less aggressive – the Bank appears to be exercising caution. The MPC is keen to ascertain whether the Strait of Hormuz, a critical shipping lane, can fully reopen, ensuring the unhindered flow of crude oil and other essential commodities like fertiliser. Two-year gilt yields currently stand at 4.17 per cent, still implying at least one further interest rate increase from the Bank.
Adding to the Bank's deliberations will be the release of the inflation figures for May. Economists are forecasting that the Consumer Price Index (CPI) inflation will climb to three per cent, an increase from the 2.8 per cent recorded in the previous month. Sanjay Raja of Deutsche Bank noted that the energy price shock stemming from the initial conflict in Iran is likely to "keep price momentum elevated for longer." Similarly, James Moberly from Goldman Sachs warned that a potential rise in food inflation could push May's CPI reading even higher than three per cent.
Bank officials are also closely monitoring services inflation, as this can offer crucial insights into underlying wage pressures within the UK economy. Although the Bank's interest rate votes will have already been cast, figures on average earnings for the three months to April are due for release on Thursday. These are expected to show pay growth of 3.3 per cent when bonuses are excluded, rising to four per cent when bonuses are factored in.
There is an expectation that the MPC's decision may not be unanimous. Barclays economist Jack Meaning predicts that two members, chief economist Huw Pill and Megan Greene, may advocate for an interest rate hike to four per cent. Deputy governor Clare Lombardelli and external member Catherine Mann are also considered potential supporters of a rate increase. While Investec economist Philip Shaw agreed that a rate rise could occur "further ahead," he expressed optimism about the improving sentiment, suggesting no hikes are likely this year, provided the situation in the Gulf remains stable.