Deutsche Bank’s Sanjay Raja reviews the latest Bank of England decision, noting Bank Rate was held at 3.75% as expected. He highlights a more divided MPC on paper but a stronger consensus for a prolonged hold. Raja expects Bank Rate to remain unchanged through 2026, with cuts next year toward a neutral 3.25% as inflation risks recede.

MPC holds rates and hawkish bias

"As expected, the Bank of England kept Bank Rate steady at 3.75% – in line with our call and market expectations."

"First, the MPC may, on paper, be more divided than in April – but there is a stronger consensus to keep Bank Rate on hold for now. Two members (Pill and Greene) opted for a rate hike, as we expected. But we think there is a growing consensus for a long hold given the more favourable economic and geopolitical backdrop."

"Second, for the MPC, recent data outturns combined with an Iran/US deal have meant that the risk around second-round effects has receded. Indeed, while the MPC still sees upside risks to inflation, lower wage and price inflation has given the MPC more confidence that price pressures may be more contained for now. Put simply, despite an inevitable inflation wave in the coming months, the MPC may be willing to tolerate and look through a temporary bump in price momentum."

"Third, the MPC has retained full optionality heading into summer. Despite better data and a dramatic fall in energy prices over the last week, the MPC avoided sounding too dovish. Instead, the MPC maintained its hawkish bias – keeping flexibility should there be any meaningful signs of indirect and/or second-round effects."

"Where to next? We stick to our call for an unchanged Bank Rate through the year. We still see rate cuts next year taking Bank Rate to a more neutral setting (3.25%). Risks are no longer one-sided, however. Better price data combined with an US/Iran deal should reduce the strength of indirect and/or second-round effects."

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