Under the dual pressure of high inflation and economic slowdown, the Bank of England is expected to remain steady tonight

According to Zhitong Finance APP, as policymakers strive to find a balance amid high inflation, rising oil prices, and economic slowdown, the Bank of England is expected to announce tonight that it will maintain the benchmark interest rate at 4.25%. It is reported that all 43 economists surveyed believe that the Bank of England will keep interest rates unchanged on Thursday. This expectation is also reflected in the pricing of the money market, where traders almost do not anticipate a rate cut on Thursday.

The Bank of England's Monetary Policy Committee (MPC) lowered rates by 25 basis points as expected in May. However, since then, UK inflation has surged to its highest level in over a year, and escalating tensions in the Middle East have further pushed up oil prices, complicating the situation.

Policymakers have begun to worry about the so-called "second-round effects," where rising prices in turn push up wages, leading to sustained high inflation for a longer period. In contrast, some signs indicate that the labor market and overall economy are beginning to tighten under the dual pressures of the £26 billion (approximately $35 billion) corporate tax increase plan introduced by Chancellor of the Exchequer Rachel Reeves and the trade war initiated by U.S. President Trump.

Voting Discrepancies

The 9 members of the Bank of England's Monetary Policy Committee (MPC) had significant disagreements last month: Chief Economist Huw Pill and external member Catherine Mann voted against a rate cut, advocating for rates to remain unchanged; external members Swati Dhingra and Alan Taylor favored a more substantial cut of 50 basis points; even among the 5 who voted in favor of a 25 basis point cut, 3 held reservations, including Governor Andrew Bailey.

The majority of economists surveyed expect the voting outcome in June to be 7 to 2, with Swati Dhingra and Alan Taylor continuing to advocate for a rate cut. George Buckley, Chief Economist for the UK at Nomura Securities, pointed out that the MPC is encouraged not to "think collectively," thus lowering the threshold for unexpected discrepancies. He believes that if economic data is weak, a third person may join the "dovish" camp. Economist Dan Hanson thinks that the most likely to change position is Deputy Governor Sarah Breeden, who is responsible for financial stability.

Policy Guidance

The Bank of England has cut rates four times since last August. Since February of this year, the Bank of England's formal policy guidance has not been modified. At that time, policymakers indicated that the market should expect a "gradual and cautious" path for rate cuts. Given last month's disagreements and the subsequent contradictory data, the MPC is expected to continue maintaining the existing statement until August.

Dean Turner, Chief Economist for the UK at UBS Global Wealth Management, stated: "The Bank of England has ample reason to stick to its gradual and cautious approach. Current data is not ideal, but it is not bad either—clearly insufficient to prompt drastic policy changes."

The market believes that the possibility of an interest rate cut in August is greater.

Bruna Skarica, Chief Economist for Morgan Stanley in the UK, believes that if there are changes in policy signals, they may be reflected in subtle ways rather than directly altering the formal statements. The committee may emphasize phenomena such as "economic stagnation and weak employment" more in the minutes, which may be reflected in a 6 to 3 voting split. She stated, "The tone of the minutes may lean dovish."

Market pricing shows that the probability of the Bank of England cutting interest rates at the August policy meeting is about 75%, with expectations for two more rate cuts by the summer of 2026, at which point the benchmark rate is expected to drop to around 3.5%.

Economic Performance

Data since the last policy meeting shows that the UK economy experienced its largest contraction in 18 months in April, with exports to the US hitting a historic low. The number of layoffs in May also reached the highest level since the pandemic. Meanwhile, energy and food prices have pushed inflation higher, and inflation expectations remain elevated. Although wage growth has fallen from its peak, the regular wage growth rate of 5.2% is still well above the level consistent with the 2% inflation target.

The Bank of England will not release new economic forecasts at this meeting (the next will be in August), but may make partial revisions to the May forecasts. In the first quarter of this year, the UK economy grew by 0.7%, performing strongly, partly due to businesses ramping up production to avoid tariffs imposed by the US. However, the Bank of England stated in May that it believes the underlying growth rate of the economy in the first half of the year will "remain roughly flat." The MPC may revise its views and comment on the latest inflation, wage, and employment data. Service sector inflation fell from 5.4% in April to 4.7% in May, which will be welcomed as the Bank of England views service prices as a key indicator of potential inflationary pressure.

Geopolitical Risks

Recently, concerns about the trade war have been replaced by escalating tensions in the Middle East. After Israel attacked Iranian nuclear facilities, the situation in the Middle East has become tense again. Oil prices have risen by about 9% in the six days since the initial attack, with the market increasingly worried that the US will become directly involved in the conflict, leading to further increases in oil prices.

Research estimates that since the beginning of this month, Brent crude oil has risen by about $10 to $75 per barrel, which could increase the UK's inflation rate by 0.1 percentage points; if oil prices rise to $85, the inflation rate could increase by 0.2 percentage points, pushing the peak inflation in September to 4%.

This has, to some extent, offset the positive progress in Sino-U.S. trade relations. The Bank of England has warned about the dangers of uncertainty to economic growth and is well aware of the impact of oil prices on inflation, expecting to once again emphasize the "dual nature" of risks