The Bank of England kept its policy rate at 3.75% on Thursday after the Monetary Policy Committee voted 6-3 to hold. Alongside the decision, the central bank published three alternative economic scenarios - central, milder and adverse - each laying out different projections for inflation, growth and energy prices across the forecast horizon.
Officials noted that financial markets currently place a high probability on two further rate increases by Q3 2027, and the scenarios incorporate that market pricing into their assumptions.
Central projection
Under the Bank's central scenario, inflation reaches a peak of 3.2% in the fourth quarter of 2026. It then drops below the 2% target to 1.7% in Q1 2028, before edging up to 1.9% by Q3 2029. Economic growth in this baseline path runs at an annual rate of 1.1% in Q3 2026 and again in Q3 2027, accelerating to 1.7% in Q3 2028 and 1.6% in Q3 2029.
Energy price assumptions in the central projection follow market curves. Brent oil is assumed to decline gradually from $76 per barrel in Q3 2026 to around $71 at the end of the forecast period. Natural gas futures peak at just over 123 pence per therm in the fourth quarter before falling to a little under 60 pence by the end of the horizon. The Bank assumes the energy shock produces moderate second-round inflationary effects.
Milder scenario
In the milder outcome, inflation peaks at 2.7% in Q4 2026, then moderates to 2.4% in Q3 2027 and 1.7% in Q3 2028 and Q3 2029. Growth is recorded at an annual 1.1% in Q3 2026 and Q3 2026, and then at 1.6% in Q3 2028 and Q3 2029. The Bank says oil and gas future prices in this scenario are similar to levels observed after the U.S.-Iran memorandum of understanding was signed - roughly 3% and 6% below the central scenario respectively.
Crucially, the milder path assumes there are no new second-round effects. A looser labour market and weak demand are assumed to limit workers' bargaining power and firms' ability to pass on higher costs, curbing persistent inflationary pressures.
Adverse scenario
The adverse scenario envisages a notably higher inflation profile. Inflation rises to 3.1% in Q3 2026, accelerates to 4.1% in Q3 2027, then eases to 2.8% in Q3 2028 and 2.4% in Q3 2029. Growth in this scenario is 1.1% in Q3 2026, slows to 0.9% in Q3 2027, and then picks up to 1.6% in Q3 2028 and 1.7% in Q3 2029.
Energy price assumptions are materially higher than in the central case: oil averages about 30% above the central projection and gas about 60% higher, though the Bank notes these levels are still below the most severe scenario considered in April. Under the adverse path, persistently elevated energy prices push up inflation expectations, producing stronger and more persistent second-round effects than in the central scenario.
The Bank's published scenarios present alternative routes for inflation and growth that hinge largely on energy price developments and the extent of second-round effects. They provide a framework for understanding how differing energy trajectories and labour market conditions could influence monetary policy decisions and economic outcomes through 2029.