They think it‘s all over...: United Kingdom Outlook

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They think it‘s all over...: United Kingdom Outlook

model, up

from the -1.4% q/q assumption that underlies our most recent forecast update. Updating our

forecast to account for this new Q4 Ofgem cap assumption alone would add c.10bp to our

headline forecast in October. There is likely to be continued pressure on this part of the curve if

passage through the Strait of Hormuz remains restricted, as Europe looks to rebuild gas storage

levels during the summer months, which are running low compared to previous years (see

Figure 61). Crucially, the backwardation in the market for the middle of 2027 still exists and,

given the relatively larger move in the front-end than further out is actually more pronounced,

suggests increased disinflationary pressure in the second half of 2027, albeit from a higher

starting point.

MPC still on course to hold

We do not think the moves currently implied by energy curves are sufficient to sway the central

bloc of the MPC. The Q2 27 contracts on gas and oil are at 90p/therm and $78/barrel

respectively. This compares to 99p/therm and $83/barrel in Scenario B from the April MPR,

suggesting still less inflationary persistence than the median voter on the MPC expected 10

weeks ago.

We heard from Governor Bailey and DG Sarah Breeden this week. Breeden, in

particular, emphasised the weakness of demand in the economy and the fact she is increasingly

confident, absent the shock in the Middle East, inflation would have been back at 2% by now,

something Bailey has also said recently multiple times. This matters, as it runs counter to the

view that there has been a structural shift in the economy that would have kept inflation above

target for a prolonged period all else equal and suggests these members are viewing the current