Bank of England to hold steady this year but Iran war inflation risks persist: Reuters poll

By Jonathan Cable

LONDON, July 24 (Reuters) - The Bank of England will not shift its key interest rate from 3.75% on Thursday according to all 70 economists in a July 21-24 Reuters poll, and likely not for another year as inflation is expected to remain firmly above the central bank's 2.0% target.

British inflation dipped to 2.6% in June, official data showed on Wednesday, as a brief de-escalation in the Iran war reduced fuel prices. But the slowdown is unlikely to last as the conflict has reignited, giving scant relief to new Prime Minister Andy Burnham.

Burnham wants to cut living costs but has yet to give full details on how that will be funded. Any decisions on tax will be announced in the budget, expected in the autumn.

Little help is likely to come from the Monetary Policy Committee. A firm majority of respondents — 58 of 70 — saw Bank Rate at 3.75% through 2026 while eight saw a 25-basis-point lift and four saw a reduction to 3.50%.

"The situation is extremely fluid, and the risks certainly are we do indeed see a rate hike this year. However, for now, I think the MPC are basing their decision off the other fact policy is already in restrictive territory," Ellie Henderson at Investec, said. She saw no change this year.

"We're a little bit under $100 per barrel now, but we were above it yesterday. And questions are going to start to be asked about what point does the MPC no longer tolerate these higher oil prices?"

According to median estimates in the Reuters poll, the first 25-basis-point drop will not come until at least July next year and will be followed by another in the fourth quarter.

The European Central Bank left its key deposit rate on hold at 2.25% on Thursday but a separate Reuters poll suggested it would raise it for a second time this year in September, taking it to 2.50%.

STICKY INFLATION

Inflation was expected to peak at 3.3% next quarter before moderating but will not fall to the Bank's target until the end of 2027, the poll found.

Across 2026 it was seen averaging 3.1% and 2.5% in 2027, slight reductions from June's poll.

BoE Governor Andrew Bailey said earlier this month he was concerned about the resumption of hostilities in the Gulf but so far there was no big impact on Britain's inflation outlook.

"While our view remains for no hikes from the Bank of England, we are acutely aware that we removed the only rate hike from our view at a time when energy prices were falling," George Buckley at Nomura said.

"Now that energy prices are rising sharply once again, so too are the risks that the MPC will be forced into a hike to counter either actual second-round effects, or possibly even the risks of them developing."

Inflationary pressures remain elevated this month and the re-escalation in tensions risks derailing the easing in cost burdens, S&P Global said when publishing a private survey earlier on Friday. 

Economic growth was put at 1.0% this year and 1.1% next, unchanged from June's poll.

(Other stories from the Reuters global economic poll)

(Reporting by Jonathan Cable; Polling by Mumal Rathore and Rhea Rose Abraham; Editing by Andrew Heavens)