Rabobank’s Senior Macro Strategist Stefan Koopman argues that the recent surge in Oil and natural gas prices has derailed expectations for near-term Bank of England rate cuts, with the policy rate now seen on hold through 2026. The energy shock is expected to lift UK inflation back toward 2.7%, keeping the Pound supported as markets reprice BoE easing further out.

BoE cuts pushed into 2027 on energy shock

"The surge in oil and gas prices has reduced expectations of a near-term BoE rate cut. By our calculations, the energy shock could easily add around 65 bps to UK inflation by mid-year, pushing it back toward 2.7% instead of the 2% previously forecast. With hardly any monetary or fiscal room to cushion the blow, the UK economy is exposed until energy markets stabilise."

"The market-implied probability of a Bank of England rate cut this month has therefore fallen sharply, from around 80% to about 25%. All major central banks have seen some repricing, but sterling markets are moving faster because the outcome may depend entirely on Governor Bailey’s vote."

"If the energy shock persists in the coming weeks and months, UK inflation will not fall to 2%. Cutting rates in that environment would risk rekindling inflation expectations, even if unemployment continues to rise. We have therefore removed our call for two rate cuts in the first half of the year."

"The UK economy now looks particularly exposed: the energy shock is squeezing incomes and confidence, while neither monetary nor fiscal policy can respond until markets stabilise. But if tensions in the Middle East ease more quickly than we expect and energy prices do retreat, we will revisit our view and re-introduce rate cuts into the 2026 forecast, given our conviction that the UK labour market is weakening."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)