Bank of England to keep rates steady while oil prices gyrate

By David Milliken

LONDON, July 30 (Reuters) - The Bank of England looks set to keep interest rates steady on Thursday as it weighs the impact of the on-again, off-again Iran war that has closed the Strait of Hormuz for the past five months and intensified inflation pressures.

Unlike the European Central Bank, which raised rates in June, Governor Andrew Bailey has said the BoE's signal back in March that previously expected cuts to borrowing costs were off the table due to the war is likely to keep inflation in check.

The U.S. Federal Reserve left rates unchanged on Wednesday, but three of the 12 members of the Federal Open Market Committee said they would have preferred a quarter-point rate rise, while Chair Kevin Warsh said he had "no tolerance" for inflation.

If the BoE keeps rates on hold, it will be a relief for new Prime Minister Andy Burnham, who has prioritised cost-of-living measures, including scrapping a tax on household electricity bills.

BOE HAS LOWERED INFLATION FORECASTS

Last month, the BoE lowered its forecast for peak inflation this year to just over 3.25% from a prediction in April of 3.6%-3.7% in two of its three scenarios for energy prices and inflation persistence.

Although natural gas prices have risen since then, oil price futures remain near the lowest of the BoE's scenarios, despite last week's spike above $100 a barrel.

"Neither current oil prices nor recent economic data warrant a hasty response, either in the form of an immediate rate hike or an overly hawkish set of communications," said Matthew Ryan, head of market strategy at financial services firm Ebury.

Bailey will address a press conference at 1200 GMT, an hour after the BoE publishes the rate decision, policy minutes and new economic forecasts.

Most economists polled by Reuters forecast the BoE's Monetary Policy Committee will vote 7-2 to keep rates on hold at 3.75%, their level since December, and they do not expect a change at all this year.

But rate futures markets on Wednesday pointed to a quarter-point hike by November and another one by March 2027.

Chief Economist Huw Pill and external MPC member Megan Greene are expected to have voted again for a rise. Deputy Governor Clare Lombardelli and external member Catherine Mann are seen as the likeliest to join them.

Mann said this month a fall in market borrowing costs could make it harder to control inflation.

However, economists expect the majority of the MPC to judge that rates remain high enough to lower inflation gradually along with a weak labour market.

The BoE is likely to reduce its forecast for inflation, helped by 0.1 percentage point of downward pressure from the electricity tax cut, UBS economist Anna Titareva said.

Inflation in June fell to a 15-month low of 2.6% — partly because Britain's regulated household energy bills lag market prices — while private-sector wage growth was its weakest since 2020 at 2.9%.

"Overall, we continue to expect the next policy move to be a cut — in February and April 2027 — not a hike," Titareva said.

However, British inflation has spent most of the past five years above the BoE's 2% target and the MPC is monitoring for any pickup in wage demands later in the year when 2027 pay settlements start to be negotiated.

The BoE is also likely to set out its view on the market impact of its bond sales over the past year after research suggested more upward pressure on gilt yields than the BoE had estimated.

In 2025, the BoE slowed the pace at which it reduces its bond holdings to £70 billion ($93 billion) a year from £100 billion. Financial market participants polled by the BoE see a further slowdown by the MPC in September to £50 billion.

($1 = 0.7521 pounds)

(Reporting by David Milliken, Editing by Rosalba O'Brien)