BoE to hold interest rates through 2026 despite inflation threat: Reuters poll

By Devayani Sathyan

April 21 (Reuters) - The Bank of England will hold interest rates steady next week and likely through the rest of the year, according to a Reuters poll of economists, who broadly stuck to the same steady policy views as last month but revised up their inflation outlook.

While financial markets began rapidly pricing in a series of rate increases last month based on concern that the surge in energy costs from the U.S.-Israeli war with Iran would require a policy response, economists did not and they have stuck to that line.

The Monetary Policy Committee is tasked with keeping inflation at 2%. It was already much higher before the war and is set to rise significantly in coming months before easing back early next year, according to the poll.

BoE Governor Andrew Bailey told Reuters earlier this month that investors shouldn't necessarily expect rate hikes and most forecasters, who broadly held the same view beforehand, appear to be taking him at his word given financial conditions have tightened considerably.

"WAIT AND SEE" APPROACH FOR NOW

There is also a high risk of stagflation - usually defined as a mix of slow growth, rising unemployment and persistent price rises - according to a majority of respondents to an extra question, giving an additional reason to keep borrowing costs steady, as addressing one problem with rates may only make the other worse.

All 62 economists in the April 16 to 21 poll expected the BoE to keep Bank Rate at 3.75% on April 30 while around 53%, or 33 of 62, now see it unchanged for the rest of the year. That was similar to the March 20 to 26 survey.

Fourteen expected at least one rate hike and 15 saw one or more cuts. In a March survey, fewer than 10% expected a hike and around a third predicted a cut.

"What the BoE is saying is, 'Look, we've already got a policy that is restrictive'," said Ellie Henderson, an economist at Investec.

"Unless we see the likelihood of this inflation surge impacting longer-term expectations, then maybe the appropriate policy path is just to hold and wait and see and not rush to raise rates, particularly as this could just be a one-time price shock."

Recent news the British economy grew much faster than expected in February is another reason for policymakers to hold steady for now.

But on Friday BoE Chief Economist Huw Pill, one of the MPC's most hawkish members, said a wait-and-see approach could be mistaken for appearing neutral on the threat of higher inflation.

Official data on Wednesday are expected to show inflation rose to 3.3% in March from February's 3.0%. But the figures are unlikely to alter the current rate outlook.

"The move we saw in the bond markets after the beginning of the war was already a great big tightening of monetary conditions. And hopefully, that will be enough to keep inflation pressures low," said Laurence Mutkin, head of EMEA rates strategy at BMO.

STAGFLATION RISK HIGH

Nearly 75% of respondents cut their growth forecast for this year with a median of 0.7% compared with 1.0% in the March survey. The International Monetary Fund also chopped its UK growth forecast recently to 0.8% from 1.3%.

More than half of contributors who participated in both the April and late-March polls - 11 of 21 - raised their 2026 inflation forecasts, by over 0.4 percentage points on average. Inflation is expected to average 3.2%, the poll median showed.

Asked about the risk of stagflation in the UK economy, 17 of 22 economists said it was high or very high. Five said low.

BMO's Mutkin said the economy had become more stagflationary since the start of the Middle East war. "There was already evidence of that tendency in the UK, with excessive inflation and a softening labour market - the energy shock has only increased that tendency."

(Other stories from the Reuters global economic poll)

(Reporting by Devayani Sathyan, Polling by Sarupya Ganguly and Aman Kumar Soni; Editing by Ross Finley and Hugh Lawson)