Philip Wee of DBS Group Research explains how Oil prices shape the Bank of England’s (BoE) policy outlook. The baseline assumes Oil around USD108 supports manageable second-round inflation effects and may require one or two rate hikes. An optimistic scenario sees a pause if prices fall on a diplomatic resolution to the Iran conflict, while a prolonged conflict and higher Oil would force a more hawkish response.

Energy path drives BoE policy choices

"Meanwhile, the OIS market has priced in a 58% chance of a Bank of England hike before the Fed at the July 30 meeting. BoE Chief Economist Huw Pill was the lone dissenter at the last meeting, calling for a prompt rate hike sooner rather than later."

"Under its baseline scenario, the BoE projects modest and manageable second-round effects on inflation from elevated energy prices around USD108 per barrel, which would lift CPI inflation to 3.7% by the end of 2026, close to 3.75% bank rate, and may require 1-2 hikes by late autumn to return inflation to the 2% target."

"Alternatively, the BoE’s optimistic scenario allows for a rate pause if oil prices recede on a diplomatic resolution to the Iran conflict."

"However, if a prolonged conflict materialises and lifts oil prices to new highs, the BoE will likely act to avoid falling behind the curve on inflation as it did in 2022."

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