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BoE seen holding Bank Rate at 3.75% after June UK inflation cools

Societe Generale expects headline inflation could peak near 3.5% year on year by end-2026 if energy prices stay elevated, leaving Bank Rate guidance sensitive to oil and gas moves.

Reported · Written up by our desk · Central Banks

Societe Generale economist Sam Cartwright said June UK inflation points to cooling pressure, with headline CPI at 2.6% year on year and core inflation also steady at 2.6%. The firm noted the reading came in below Bank of England projections, driven largely by fuel-led disinflation.

The analysis highlights that energy effects beyond fuel appear limited so far, as indirect pass-through from higher energy inputs is expected to be constrained by firms' limited pricing power. Cartwright also pointed to only modest expected increases in core inflation.

Societe Generale expects the BoE to keep Bank Rate at 3.75% through 2026, with potential cumulative 75 basis points of cuts in 2027. However, it flagged that a rise in Brent crude and European wholesale gas prices implies headline inflation could peak closer to 3.5% year on year at end-2026 versus a prior 3.0% estimate.

The outlook includes a small offset from the government's recently announced VAT cut on consumer electricity prices, which the firm estimates could reduce headline CPI by around 0.1 percentage point. Cartwright added that uncertainty tied to the US-Iran conflict could either reinforce higher energy costs and risk rate hikes, or if energy moderates, allow the BoE to follow the baseline path of holding rates first.

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