All 65 economists surveyed by Reuters unanimously forecast the Bank of England (BoE) will keep its key interest rate at 3.75% at its policy meeting next Thursday. However, UK financial markets are currently in a phase of high uncertainty about the direction of borrowing costs for the rest of the second half of the year.
Inflationary pressures in the UK are reportedly moving rapidly towards a peak of 3.6% by the end of 2026, almost double the central bank’s official target of 2%. The surge in living costs follows the US-Israeli military crisis with Iran that has paralyzed the logistics chain of commercial oil tankers in the Strait of Hormuz since late February.
Deutsche Bank drew market attention by warning that the drag of existing wartime energy costs is starting to seep into the secondary economy. BoE strategist Megan Greene also confirmed that there is a growing macroeconomic case for raising borrowing costs if Brent crude oil prices remain above their highs, following the European Central Bank (ECB) which just raised interest rates to 2.25% on Thursday.
In commodity markets, energy markets showed signs of technical easing with Brent crude oil prices down to around $88.06 a barrel on Friday afternoon. The decline was driven by optimistic statements by US President Donald Trump that a written “Final Deal” with Tehran could be signed this weekend. However, banking firm ING predicts that if Trump’s talks fail, oil prices risk rising back to $120 a barrel by the summer.
In terms of domestic growth, the United Kingdom’s GDP was reported to have contracted by a surprise 0.1% in April, marking the first monthly decline since August last year due to a slump in service sector activity. Despite the contraction, Reuters survey data revised up the UK's annual economic growth forecast to 1.0% for 2026, in line with the latest optimistic forecast from the OECD.
