At current energy prices, is set to peak between 3.5-4% this autumn. That’s around a percentage-point higher than we’d expected pre-war, not exactly a game-changer for a central bank that was on the verge of cutting rates this month. Clearly, we can’t rule out rate hikes if energy prices spike further, but our base case is a pause throughout 2026.
For the to hike rates, we think oil prices would need to be sustained at 120 USD/bbl.
Current pricing for the Bank of England looks extreme. Markets are pricing three hikes this year, albeit those expectations are likely being distorted by poor liquidity in the swaps market.
We don’t think it is at all clear that the bar for rate hikes has been met, at current levels of oil and gas prices.
Our revised Bank of England base case is a pause throughout 2026, with rate cuts resuming in early 2027.
Admittedly, nobody knows exactly where the threshold for hikes truly lies; last week’s meeting didn’t give much away. But last summer, Bank research suggested that second round effects tend to become more pronounced when headline inflation exceeds 3.5-4%. This is a helpful line in the sand.
At current energy prices – oil at 100 USD/bbl and TTF natural gas at 50-55 EUR/MWh – UK inflation would likely peak briefly at 4% in the autumn. Alternatively, under ING’s energy base case, where disruption starts to ease through 2Q and energy prices begin to gradually fall back, we’d expect a peak of 3.5% in September.
Source: Macrobond, ING
For context, that is a percentage-point higher than we had anticipated before the war began. That is not a game-changer for a central bank that was otherwise ready to cut rates at the March meeting, particularly when set against the wider context of a fragile jobs market.
Firms are much more likely to deal with higher energy bills by cutting jobs than aggressively raising prices. This is exactly how the hospitality sector responded to last year’s National Insurance/minimum wage hikes.
We think 2025, not 2022, is the playbook for how the economy is likely to respond to the current crisis.
In terms of timing, pretty much whatever happens, inflation is likely to fall back in the very short term. The Ofgem household energy price cap won’t be updated again until July, which is the earliest point we’ll see the true impact of higher natural gas prices (and the impact on electricity costs). Current wholesale prices are consistent with roughly a 25% increase in energy bills in July.
Before then, we expect headline CPI to drop to 2.3% in April from 3% in February, as a whole raft of changes made at the start of the last financial year drop out of the annual comparison. Notably, this April’s rise in water/sewerage bills is much less dramatic. Services inflation should drop by upwards of one percentage point, from 4.3% last month.
For the Bank to hike rates – something that clearly can’t be ruled out – we think we’d need to see oil prices sustained at 120 USD/bbl or above, or European natural gas prices in excess of 70 EUR/MWh. That would take inflation materially above 4%. A sizeable energy support package would also substantially raise the chances of rate rises. Currently that looks unlikely, though the political backdrop is volatile going into May’s local elections.
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