The Bank of England’s ability to ease monetary policy faces a growing headwind from surging global oil prices, even as April consumer price data is expected to show a significant slowdown. Combined analysis from DBS Group Research and a preview of the UK Office for National Statistics’ upcoming CPI release highlights a delicate balance: near-term relief from earlier energy shocks could quickly unravel if crude markets remain elevated.
April CPI: A Whisker from Target
Economists surveyed by Reuters forecast headline annual inflation to drop to 2.1% in April, down sharply from 2.6% in March and within touching distance of the BoE’s 2% target for the first time since mid-2021. The improvement is largely driven by base effects—last year’s steep energy price hikes dropping out of the annual calculation—and moderating food costs. Core CPI, however, is expected to remain stickier at around 3.5%, while services inflation, a key metric for the Monetary Policy Committee, is likely to ease only modestly due to persistent wage pressures.
Oil’s Sudden Surge Poses Upside Risk
The positive short-term narrative is being overshadowed by a rally in Brent crude, which has surged past $90 per barrel. Supply disruptions in the Middle East, extended OPEC+ production cuts, and stronger-than-expected global demand have pushed UK petrol prices to their highest since November. Analysts warn that unless oil retreats, higher transportation, utility, and manufacturing costs will feed back into the headline inflation prints from May onward.
DBS Group Research explicitly models oil price trajectories in its BoE scenarios. A sustained price above $85 per barrel could force the central bank to hold rates steady for longer, possibly into the second half of 2025. A drop below $70 would reduce inflationary pressure enough to bring forward rate cuts.
Rate Cut Expectations Shift
“The April CPI data will likely show a welcome dip, but it’s the May and June figures that will really matter for the BoE,” said Sarah Thornton, chief UK economist at Oxford Economics. “If oil stays above $90, we could see headline inflation rebound above 3% by the third quarter. That would effectively slam the door on any rate cuts this year.”
Markets have already adjusted. With the BoE’s benchmark rate held at 5.25% in May, traders have pushed expectations for a first cut from August back to November or later. Sterling has weakened slightly against the dollar, and gilt yields have edged higher. The FTSE 100, buoyed by energy stocks, has benefited, but domestically focused sectors remain pressured by the higher-for-longer rate environment.
For UK households, any respite at the pump may prove temporary. The Ofgem price cap update in July is likely to reflect rising wholesale costs, potentially increasing household bills. Coupled with wage growth still around 6%, the BoE may find it difficult to justify loosening policy even as broader economic activity slows.
