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Berenberg: Bank of England to Hold Key Rate in July Meeting; December Rate Cut Possible

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Berenberg expects the Bank of England to maintain its benchmark interest rate at 3.75% at its Thursday monetary policy meeting but "threaten" to increase it if energy prices rise a lot more or evidence of second-round effects materializes amid the continued US-Iran war.

"This provides a convenient insurance policy for the BoE: every time the Iran conflict flares up, investors revise up their interest rate expectations and mortgage borrowing costs rise, immediately squeezing demand and reducing the risk of persistent inflation," Berenberg Senior UK Economist Andrew Wishart said in a Wednesday note. "We do not think that the BoE will follow through with its threat to raise interest rates for two reasons: 1) Inflation in wages and services prices - the part of inflation that the BoE can best influence - continue to trend lower. 2) We think US President Donald Trump wants to avoid high oil prices because high petrol prices would damage the Republican party's chances in the 3 November mid-term elections."

If this reasoning holds, Berenberg noted that it forecasts the UK central bank will adopt a more dovish stance for the remainder of 2026 and resume lowering rates in December, with a majority on the monetary policy committee voting in favor of a cut.

The BoE is then expected to cut the bank rate two more times to 3% in mid-2027.

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