Entrenched inflation – what it means for Fed policy and Treasury yields

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BoE preview: rates on hold, hawkish bias intact

Investment Insights • Macro

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BoE preview: rates on hold, hawkish bias intact

The Bank of England’s Monetary Policy Committee (MPC) is next meeting on 18 June against a background of stable inflation and weak labour markets. In this Macro Flash Note, Economist Joaquin Thul explains why we expect the MPC to keep rates on hold but maintain a hawkish tone in its communications.

Joaquin Thul

Joaquin Thul

Expectations are set for the Bank of England (BoE) to keep Bank rate on hold at 3.75% when the MPC next meets on 18 June. The meeting is expected to provide interesting insight into how MPC members assess the inflation risks to the UK economy. The split of the vote will be important for understanding the Committee’s expectations for inflation and its assessment of the current state of the economy.

The nature and persistence of the shock

The previous decision from the MPC to keep Bank rate unchanged was justified at a time when it was too early to determine the impact of the energy price shock resulting from the war in the Middle East. Following the recent announcement of an agreement between the US and Iran, markets have re-assessed their expectations for rates in the coming months, with only one rate hike now priced-in for Q4-2026 compared to two rate hikes that were expected just over a week ago.

The wait-and-see approach followed by the MPC was intended to help them assess the “nature and persistence of the shock” before making any changes to monetary policy. Recent economic data in the UK has been weak, with inflation falling from 3.3% in March to 2.8% in April and May year-on-year (YoY). Weak inflation data, driven by low food prices offsetting the rise in transport costs, highlights slow activity levels in the UK and the smaller-than-expected impact of higher energy costs.

At the same time, there are mixed signals from the labour market. While the unemployment rate has barely moved over the past six months, the Recruitment and Employment Confederation (REC) survey, showed that weak confidence and cost pressures continue to weigh on hiring activity1, reflected in the fourth consecutive monthly decline in the number of vacancies. In another sign of labour market fragility, UK firms have increased hiring of temporary workers, while permanent hiring declined in May at the fastest pace since July 2025.

In line with the experience in other countries, expectations for UK inflation have increased since the onset of the Middle East war, with a median forecast for annual inflation of 3.2% by the end of Q4 (see Figure 1), based on the outlook for higher energy prices. However, oil prices have already moved meaningfully lower in response to the Iran-US deal with markets anticipating that traffic will start to flow freely again through the Strait of Hormuz. If this transpires, the probability of strong second round effects to the rest of the economy in the second half of the year will be reduced.2

Conclusion

In summary, given the recent inflation data, a softer labour market, and the growing likelihood of a solution to the conflict in Middle East, we expect the BoE to keep interest rates on hold at 3.75% at their June meeting. With the UK economy growing at an annual pace of just over 1%, and inflation at 2.8%, current Bank rate at 3.75% maintains a tightening bias to the BoE’s monetary policy. As such, absent any other shocks to the economy, it is questionable whether there is any need for further policy tightening and there is a growing case to keep rates on hold for a longer period of time.

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