Bank of England Rate Cut Cycle Extended: Energy Shocks Delay Easing

March 2025, London – The Bank of England's originally planned rate cut process is being significantly delayed due to ongoing volatility in global energy markets, according to the latest analysis from Rabobank. Although overall inflation has fallen significantly from its 2022 peak, persistent core inflation and service price pressures are continuously postponing the window for a shift towards looser monetary policy.

The Bank of England's Monetary Policy Committee (MPC) has been committed to controlling inflation since 2024, but structural fluctuations in energy prices have become a key obstacle. Although wholesale natural gas prices have fallen from historical highs, geopolitical risks and supply chain restructuring continue to drive up corporate operating costs. These costs permeate into consumer goods and services through price transmission mechanisms, forming a "second round inflation effect." To curb entrenched inflation expectations, the Bank of England has had to maintain higher interest rates for longer. Compared to the Federal Reserve, which may cut interest rates first due to its strong energy self-sufficiency, or the European Central Bank, which is affected by different structural factors, the UK's economic structure makes it more sensitive to international energy prices. Its household heating and electricity systems are highly dependent on natural gas, causing energy fluctuations to have a more direct and lasting impact on the CPI. Rabobank points out that the transmission chain of rising energy costs is clear: from rising upstream energy prices to companies raising prices for goods and services, to workers demanding wage increases to cope with rising living costs, which may eventually trigger a wage-price spiral. The Bank of England aims to break this cycle by maintaining high interest rates to suppress aggregate demand, but this also means that corporate investment and household consumption may face greater pressure, and economic growth momentum may be further suppressed. It is worth noting that although overall CPI data has improved, service inflation remains high, and previously signed long-term energy contracts will continue to affect terminal prices in the coming months. This means that the path of inflation decline is not linear, and policymakers must strike a delicate balance between controlling inflation and avoiding excessive economic slowdown.