Three more cuts but we'll have to wait for them

HSBC has issued a research note this morning, saying UK CPI inflation following the war in Iran could now be 0.5% higher than previously expected – even if the situation in Iran improves. It still sees three more rate cuts from the Bank of England (BoE), but now expects a lengthy pause and a restart in November 2026. With a weaker labour market and less scope for a fiscal bailout than in 2022, HSBC believes the bar for hikes is high. Read the full report >> here << or (suggested) the bullet points below and share your views. In short, do you agree? Story is being written NOW so park the Shreddies.

What does the energy shock mean for the UK?

While it's hard to predict how the Middle East situation will play out from here, our oil and gas analysts have set out several scenarios, including a base case whereby the Strait of Hormuz gradually opens back up over the next couple of months, allowing energy prices to normalise. In this note, we set out what that would mean for the UK.

Inflation half a point higher

Based on this scenario, and incorporating the mechanical impact of higher energy prices on fuel and household energy prices, we think CPI inflation could be 0.5ppts higher between July and September 2026 than we previously thought. In practice, this means the difference between inflation more or less at target, and a significant overshoot (2.6% y-o-y in September).

Three differences between now and 2022 (or three reasons not to hike rates)

We see three differences between now and the energy crisis of 2022. First, the magnitudes are much smaller. In that episode, the energy price cap – a quarterly ceiling on energy prices set by the regulator Ofgem – would have risen to over GBP4,000 without government intervention. In this case we have pencilled in GBP1,800. Second, there is less scope for a government bailout to cushion the blow for households. And third, in 2022, a booming jobs market meant that conditions were ripe for second-round effects to take hold, whereas demand is now weaker.

Against this backdrop, we think the market has gone too far in pricing out all but 10bps of easing (at the time of writing) – and certainly in pricing in a chance of hikes, as it did earlier this week. We still expect three cuts taking Bank Rate to 3.00%, though we think this will take a little longer than previously forecast. We now see a lengthy pause, with cuts resuming in November 2026, February 2027 and April 2027.

That said, even if/when the market comes round to our view, it will still need to weigh up the dovish implications of lower rates against continuing political risk. And recent developments do not appear to have relieved pressures on this front. The UK's narrow path to recovery appears to have got even narrower.