Exness: Oil prices remain elevated; can the Bank of England (BoE) maintain its dovish stance?

Less than two months ago, Bank of England (BoE) Governor Andrew Bailey was still trying to convey one key message to markets: don’t assume the BoE is gradually moving toward its next rate hike just because a few Monetary Policy Committee (MPC) members supported raising rates. As tensions in the Middle East escalate once again, crude oil prices briefly surged past USD 100 per barrel, re-establishing energy prices as the largest global driver of inflation. Meanwhile, markets have nearly fully priced in a BoE rate hike in November—and anticipate cumulative tightening by year-end. This week, both Goldman Sachs and Citigroup revised their forecasts: previously expecting no hikes until 2026, they now believe the BoE will need to raise rates further. For the British pound, this has suddenly made Thursday’s BoE meeting far more complex than originally anticipated. At its July meeting, the BoE voted 6–3 to hold its benchmark rate at 3.75%. Although the number of policymakers voting for a hike rose from two to three, the majority still judged that domestic UK inflationary pressures are easing—particularly given cooling in the labor market, and the fact that higher energy prices have yet to meaningfully feed through into wages and services pricing—thus rendering further policy tightening unnecessary for now. Governor Bailey subsequently explicitly downplayed market speculation about consecutive rate hikes. The problem? At that time, oil prices were still hovering around USD 90. According to Eric, an analyst at Exness, what central banks truly fear is never just the rise in oil prices themselves—but rather whether energy price increases trigger a second-round inflationary spiral: firms passing on higher costs to consumers, workers demanding higher wages due to rising living costs, and those wage gains then pushing up service prices further. If it’s merely gasoline becoming more expensive, the BoE can tolerate it. But if oil-driven inflation begins feeding into wages and services inflation, the BoE will find it extremely difficult to remain patient. That question currently remains unanswered. UK CPI rose from 2.6% to 2.9% in July, while services inflation remained stubbornly high at 3.6%. Meanwhile, UK GDP grew by 0.4% in July—beating market expectations—and suggests the UK economy, at least for now, remains robust enough to afford further monetary tightening.

The Bank of England held rates steady as expected, but Middle East conflict 'significantly affects' inflation; multiple officials hint that a rate-hike window is approaching.

Against the backdrop of ongoing Middle East conflict, the Bank of England opted to hold rates steady—but signals of a policy pivot are growing increasingly clear. Governor Bailey stated that the Middle East conflict has 'significantly affected' the trajectory of the UK’s Consumer Price Index (CPI), and the Bank’s mandate is to prevent such shocks from becoming entrenched. He projected that inflation would edge slightly above 3.5% by year-end. On April 30, the Monetary Policy Committee voted 8–1 to keep the base rate unchanged at 3.75%, in line with market expectations. Yet several MPC members explicitly signaled that, should energy prices remain persistently elevated, they would not rule out supporting a rate hike at upcoming meetings. Prior to the announcement, oil prices had already surged to wartime highs—approaching the BoE’s most pessimistic scenario threshold of USD 130 per barrel—further intensifying market nervousness. Notably, amid the high uncertainty stemming from Iran-related developments, the BoE unusually abandoned its single central inflation forecast. Instead, it presented three distinct scenario frameworks—each contingent on differing trajectories of energy prices and second-round inflation effects—and all three scenarios point toward higher interest rates. All three scenarios point to rate hikes—with the worst-case requiring substantial tightening. The BoE’s three inflation scenarios provide the market with crucial guidance for interpreting future policy paths. Several officials—including Governor Bailey—regard the central scenario as the most likely baseline: inflation peaks at 3.7% by year-end, accompanied by modest second-round effects. However, the most pessimistic scenario has raised particular alarm among market participants. Should oil prices remain near USD 130 per barrel, inflation would climb to a peak of 6.2% in early 2027—and stay above the 2% target throughout the entire forecast horizon. Under this scenario, model projections indicate the policy rate may need to be raised by 66 to 151 basis points.

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Bank of England Governor Andrew Bailey warned that persistent high oil and gas costs will pressure policymakers to raise interest rates soon. Traders anticipate hikes as industrial energy costs soar and inflation risks increase.

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BOE Governor Bailey Warns Rate Hikes Likely Amid High Energy Costs

BOE Governor Bailey Warns Rate Hikes Likely Amid High Energy Costs

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