Rabobank’s Senior Macro Strategist Stefan Koopman has stated that the recent surge in oil and natural gas prices has significantly altered expectations for Bank of England (BoE) rate cuts, with the policy rate now projected to remain on hold through 2026 [1]. According to Rabobank's calculations, the energy shock could add approximately 65 basis points to UK inflation by mid-year, raising it toward 2.7% instead of the previously forecast 2% [1]. This shift has led to a sharp decline in the market-implied probability of a BoE rate cut this month, dropping from around 80% to about 25% [1].
Koopman notes that all major central banks have experienced some repricing, but sterling markets are moving faster, with the outcome potentially hinging on Governor Bailey’s vote [1]. The energy shock is expected to squeeze incomes and confidence in the UK, and with limited monetary or fiscal room to cushion the impact, the economy remains exposed until energy markets stabilize [1]. Rabobank has removed its call for two rate cuts in the first half of the year, citing concerns that cutting rates in the current environment could rekindle inflation expectations, even as unemployment continues to rise [1].
Looking forward, Rabobank suggests that if tensions in the Middle East ease and energy prices retreat, they may revisit their forecast and re-introduce rate cuts into the 2026 outlook, given their conviction that the UK labor market is weakening [1]. However, until such stabilization occurs, the BoE is expected to keep rates unchanged, and the Pound is likely to remain supported as markets reprice the timing of monetary easing [1].
CONCLUSION
The surge in energy prices has delayed expectations for Bank of England rate cuts, with Rabobank now projecting no cuts until at least 2026. This repricing has led to a sharp drop in the probability of near-term easing and is expected to keep UK inflation elevated. The market impact is high, as the Pound remains supported and monetary policy is likely to stay restrictive until energy markets stabilize.