European Daily BoE Recap—Hurdle to Hike

Economics Research 30 July 2026 | 8:18PM BST

European Daily: BoE Recap—Hurdle to Hike

n The MPC voted 6-3 to hold Bank Rate at the July meeting, a slightly more hawkish James Moberly | vote split than expected. The Committee acknowledged upside risks to inflation Goldman Sachs International and reiterated that it stands ready to act as necessary to return inflation to Sven Jari Stehn target, with Bailey again suggesting that it is reasonable for the market to price | Goldman Sachs International some risk that Bank Rate could rise if inflation proves more persistent. n Nonetheless, we think the communications are consistent with an unchanged Bank Rate this year. First, the minutes emphasised weaker underlying inflation and noted “little evidence so far” of second-round effects. Second, the projections showed inflation peaking slightly lower than expected and below levels at which the Bank has previously become concerned about broad-based inflationary pressures. Third, Bailey noted evidence of weaker inflation persistence and pushed back against a suggestion that the MPC is edging towards a hike. Fourth, other Committee members did not seem close to joining the dissenters, with Lombardelli suggesting that it was “clear” that a hold was the right decision and Ramsden discussing the possibility of cuts as well as hikes. n Looking ahead, we continue to expect the MPC to remain on hold throughout 2026 given a restrictive policy stance, labour market slack, and likely limited second-round effects. Although near-term risks are still tilted hawkish—the MPC could tighten policy if energy price pressures or second-round effects prove larger than expected—we continue to see market pricing for Bank Rate as too high.

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The MPC voted 6-3 to hold Bank Rate at the July meeting, with Pill, Greene, and Mann dissenting in favour of a 25bp hike. The vote split was slightly more hawkish than our forecast and consensus of 7-2. While we had expected that tighter financial conditions would persuade Mann to continue to vote with the majority, she instead supported a policy tightening on the back of recent energy price volatility.

The Committee judged that risks to the inflation outlook are tilted to the upside, with the minutes noting concerns that repeated re-escalations of the Middle East conflict could prolong energy price volatility. The minutes reiterated that the Committee “stands ready to act as necessary” to return inflation to target, and Bailey again suggested that it was reasonable for investors to price some risk that Bank Rate could rise if inflationary pressures turn out to be more persistent.

Nonetheless, we think the communications point to Bank Rate remaining unchanged this year.

First, the Monetary Policy Summary placed more emphasis than we had expected on softer incoming domestic wage and price data. Although the Summary reiterated that the risk of second-round effects increases the longer that energy prices remain elevated – as expected – a new sentence added that there is “little evidence so far to suggest such effects” and noted “clear signs of underlying disinflation in recent data”. While some members saw little signal in the latest data because it could take time for higher energy prices to translate into broader inflation pressures, others suggested that the early data indicated limited second-round effects ahead.

Second, the central projection showed headline inflation peaking at 3.2% in Q4, 0.1pp lower than we had expected and 0.5pp below the middle scenario (“scenario B”) in the April MPR. Last year, the MPC appeared to become more concerned about the risks of second-round effects when inflation approached 4%, suggesting that it could take a meaningful overshoot for those concerns to re-emerge. The two- and three-year ahead projections were also lower than in April, showing inflation dropping below target. While the three-year ahead forecast was in line with our expectation at 1.9%, the two-year ahead number was a tenth lower than we…