According to a survey of economists, the Bank of England is expected to keep interest rates unchanged next week and likely maintain this stance for the remainder of the year. Economists have broadly maintained their stable policy outlook from the previous month, while revising their inflation expectations upwards. Despite financial markets quickly pricing in a series of rate hikes last month due to concerns that a US-Israel conflict with Iran could drive up energy costs and require a policy response, economists have not followed this view and have stuck to their original stance.
The Monetary Policy Committee's statutory mandate is to keep inflation at 2%. The survey indicates that pre-conflict inflation was already significantly above this target, is expected to rise sharply in the coming months, and then fall back early next year. Notably, Bank of England Governor Andrew Bailey stated earlier this month that investors should not treat a rate hike as a foregone conclusion. Most forecasters already held this view, and the current significant tightening in financial conditions appears to make them more inclined to accept Bailey's guidance.
A majority of respondents currently favor a "wait-and-see" approach, with many perceiving a high risk of stagflation—typically defined as a combination of slow economic growth, rising unemployment, and persistent price increases. This provides an additional rationale for keeping borrowing costs stable, as using interest rate tools to address one problem could potentially exacerbate another.
In the survey conducted from April 16 to 21, all 62 economists polled expected the Bank of England to keep the Bank Rate at 3.75% on April 30. Approximately 53% (33 of 62) believed rates would remain unchanged for the rest of the year, a result similar to the March 20-26 survey. Fourteen respondents anticipated at least one rate hike, while fifteen expected one or more rate cuts. In a March survey, fewer than 10% had anticipated a hike, and about a third had predicted cuts.
Ellie Henderson, an economist at Investec, noted, "The message from the Bank of England is 'we have restrictive policy in place.' Barring evidence that this inflation spike risks affecting longer-term expectations, the appropriate policy path now is to hold steady, watch developments, and avoid a hasty rate hike—particularly as this may be a one-off price shock."
Recent data showing the UK economy grew faster than expected in February is another reason for policymakers to maintain stability for now. However, Huw Pill, the Bank of England's Chief Economist and one of the MPC's most hawkish members, warned on Friday that a wait-and-see approach might be misinterpreted as being neutral towards the threat of high inflation.
Official data released on Wednesday is expected to show inflation rose to 3.3% in March from 3.0% in February, but this reading is unlikely to alter current interest rate expectations. Laurence Mutkin, Head of EMEA Rates Strategy at BMO Capital Markets, said, "The move in bond markets following the outbreak of war has constituted a significant tightening of monetary conditions. Hopefully, this will be sufficient to dampen inflationary pressures."
Stagflation risks are perceived as high. Nearly 75% of respondents lowered their growth forecasts for this year, with the median forecast at 0.7%, down from 1.0% in the March survey. The International Monetary Fund recently also cut its UK growth forecast from 1.3% to 0.8%. Among respondents who participated in both the April and late-March surveys, more than half—11 out of 21—increased their inflation forecasts for 2026, with an average upward revision of over 0.4 percentage points. Inflation is projected to average 3.2% this year.
When asked about the risk of stagflation in the UK economy, 17 out of 22 economists considered the risk high or very high, while only five viewed it as low.
In stark contrast to inflationary pressures, the UK labour market is showing clear signs of weakness. Recent data indicates that redundancy notifications in March hit their highest level in recent years, signalling an accelerated cooling of the labour market. With businesses facing the dual pressures of soaring energy costs and high interest rates, expansion plans have frozen, and job vacancies continue to decline.
Tax data released by the Office for National Statistics on Tuesday showed a reduction of 11,000 employees on payrolls, the largest drop since last November and double the decline seen in February. This result was worse than economists' expectations for no change. These figures suggest the seven-week-old conflict is placing new strain on the jobs market, which had previously shown tentative signs of stabilising after being impacted by significant increases in wage taxes and the minimum wage implemented by the Labour government led by Prime Minister Keir Starmer. Job vacancies have now fallen to their lowest level in nearly five years.
While rising unemployment somewhat weakens workers' bargaining power, helping to ease wage-price spiral inflation, it also exposes a severe lack of momentum in economic growth. BMO's Mutkin stated that since the outbreak of the Middle East conflict, the UK economy has taken on more stagflationary characteristics. "The UK was already showing signs of this—inflation too high and a softening labour market—the energy shock has just exacerbated that trend."