Energy shock complicates easing path – Nomura

Nomura economists expect the Bank of England to keep rates on hold next week, highlighting that $100 Oil could add about 0.6 percentage points to UK CPI via fuel costs. They argue rising energy prices will lift inflation in several CPI components, justifying current policy, but still see two more BoE cuts in April and July toward a 3.25% terminal rate, with higher energy prices a risk to this timing.

BoE to hold now but cut later

“We take a look this week at the various ways rising energy prices pass-through into the UK’s CPI. In the first four stages – petrol (which we think itself will add 0.6pp to CPI inflation from $100 oil prices), energy bills, core goods and second round effects – the impact is decidedly positive, and this is what the BoE should respond to by holding rates next week. But if growth weakens there could be a longer-term drag on inflation.”

“UK data have been mixed. The job market is slowing, as past policy restriction weighs on growth. Further monetary easing is needed with the BoE’s forecasts showing inflation at or below target from mid-year onwards.”

“However, there are risks from sticky service prices and recent energy price rises. We see two more cuts (April/July) for a terminal rate close to neutral (3.25%). Further energy price increases could yet delay that profile.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)