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.” Author