Bank of England seen holding rates as inflation risks keep hike bets alive

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BOE holds rates on inflation

Highlights

All 65 economists in a June 5-12 Reuters poll expect the Bank of England to hold its rate at 3.75% on June 18, with nearly 40% predicting at least one hike this year.
British inflation is projected to peak at 3.6% in late 2026, well above the BoE's 2% target, with elevated energy costs and ongoing geopolitical tensions seen fuelling further price risks.
UK growth outlook has improved, with economists now expecting 1.0% GDP expansion in 2026 and 1.1% in 2027, despite recent month-on-month contractions in services and overall economic activity.

June rate outlook and policy signals

As reported by Reuters, all 65 economists in a June 5 to 12 poll expect the Bank of England to leave its key interest rate unchanged at 3.75% on June 18. The median forecast in the survey also shows Bank Rate staying at that level through the rest of 2026, although nearly 40% of respondents still predict at least one rate hike and only six expect a 25-basis-point cut by year-end.

Sanjay Raja of Deutsche Bank says his base case remains no change in Bank Rate this year, but the likelihood of an increase is rising as the energy shock becomes more prolonged. He says persistent energy prices at current levels could push the risks toward tighter monetary policy as broader price pressures become more uncomfortable.

Governor Andrew Bailey says it is important to return inflation to target and give households confidence in the central bank's ability to do so. BoE policymaker Megan Greene says last week that the case for raising interest rates is growing as the Iran war continues and raises the chance of wider price increases across the economy.

Inflation and growth pressures on the UK economy

Economists in the poll see British inflation peaking at 3.6% toward the end of 2026, close to double the central bank's 2% target. Inflation is then expected to average 3.3% across 2026 before easing to 2.6% in 2027.

Price pressures have intensified as the U.S.-Israeli war with Iran drives up energy costs and disrupts shipping through the Strait of Hormuz. James Smith of ING says his base case is for disruption to continue through June and July, with oil prices rising back above $100 a barrel and possibly reaching $120.

The survey shows the growth outlook improving slightly despite those pressures, with the UK economy expected to expand 1.0% in 2026, up from 0.8% in a May poll, and by 1.1% in 2027 before accelerating to 1.5% in 2028. Earlier this month, the OECD raised its 2026 forecast for Britain to 0.9% from 0.7%, while recent data still point to strains, including a small drop in May services activity and a 0.1% contraction in April, the first monthly decline since August.

Our earlier coverage of the Bank of England’s inflation attitudes survey highlighted a sharp rise in households’ inflation expectations as energy prices climbed amid the Iran conflict. The survey showed one-year expectations jumping to 4% and five-year expectations reaching a record 3.9%, levels that could make it harder for the BoE to keep inflation anchored near its 2% target.

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