Bank of England oil shock forecasts face credibility questions

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Bank of England oil shock forecast

Highlights

Bank of England's published April 2026 oil shock scenarios diverge materially from results implied by its August 2025 oil multipliers, especially for inflation and growth.
Scenario B assumes oil peaks at $108 per barrel and Scenario C above $127, yet the April 2026 report shows almost unchanged growth forecasts, raising internal consistency concerns.
The Bank's August 2025 multipliers are three to four times higher than those of other central banks, with implied inflation outcomes well above inflation market levels, pressuring policy credibility.

Forecast models and April scenario gaps

As reported by Financial Times, the Bank of England published oil price shock multipliers in August 2025 to show how energy moves could affect output and inflation under a more transparent, model-based framework. The article says those same multipliers, when applied to the bank’s February 2026 inflation and growth projections using the April 2026 Monetary Policy Report energy assumptions, produce results that diverge sharply from the published forecasts.

The August 2025 exercise included two sets of multipliers, one based on the bank’s flagship DSGE model and another using a local projections approach. When those estimates are applied to Scenario B in the April 2026 report, which most Monetary Policy Committee members support, the implied inflation path is materially higher than the bank’s published scenario.

The discrepancy is larger still for growth. Scenario B assumes oil peaks near $108 a barrel, while Scenario C, the adverse case, assumes a peak above $127 a barrel, yet the published growth profile remains almost unchanged, at 0.7% in the second quarter of 2026 in all cases and 0.5% to 0.8% in the second quarter of 2027.

Implications for policy credibility

A sustained oil price difference of about $21 a barrel producing almost no output gap raises questions about the internal consistency of the bank’s scenario analysis. Applying the August 2025 growth multipliers to the oil paths in Scenarios B and C implies GDP levels far below the bank’s published track, with one model suggesting a moderate recession by mid-2027.

The article notes that direct comparisons may be imperfect, because the Bank of England’s August 2025 oil shock multipliers appear three to four times larger than estimates from other major central banks and from mechanical calculations based on energy’s share of the consumer price basket. They also imply inflation outcomes well above levels reflected in inflation markets, adding to concerns over how the bank is calibrating its scenarios.

The April 2026 report does not refer back to the August 2025 multipliers or explain the difference, despite Ben Bernanke’s 2024 review having made internally consistent scenario analysis central to the bank’s reform agenda. That leaves the Bank of England facing pressure to reconcile its assumptions across Monetary Policy Reports if it wants to strengthen confidence in its forecasting framework.

Our earlier coverage of the IMF’s updated outlook for the UK explained how higher energy prices tied to the Iran war are complicating the Bank of England’s rate path. We noted the IMF’s view that keeping policy restrictive could still be appropriate to prevent second-round effects, while policymakers should remain ready to cut if growth weakens amid unusually high uncertainty.

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