The Bank of England is expected to hold rates steady this week, but conflict in the Strait of Hormuz may trigger a rate hike.

(1) The Bank of England is expected to keep its key interest rate unchanged at 3.75% for the fourth consecutive time on Thursday, but will signal that if the conflict in the Strait of Hormuz triggers a broad and persistent rebound in inflation, it stands ready to increase borrowing costs. Recently, UK inflation has remained consistently below expectations (June year-on-year at 2.6%, lower than February's 3%), and surveys show that cost growth has slowed for the third consecutive month, with businesses also expecting price hikes to be more moderate, temporarily easing urgent pressure to raise interest rates.(2) However, the longer the conflict between the US and Iran restricts traffic in the strait, the higher oil and natural gas prices become, and the more likely workers are to demand significant wage increases to make up for lost purchasing power, which in turn leads to businesses passing on higher costs—what central bank officials call "second-round effects." Although the impact of Middle East tensions on UK inflation and economic activity has been weaker than expected, the International Monetary Fund has already warned that as the strait closure enters its sixth month, buffer measures such as increased production and reserve consumption by oil-producing countries are being exhausted.(3) As in June, it is expected that Huw Pill and Megan Greene will vote in favor of raising interest rates to 4%, and some economists believe Catherine Mann may also join them. Economists from Oxford Economics and Investec both believe that the central bank's communications at the July meeting will highlight the risks of rising inflation and indicate a willingness to raise rates at the first signs of second-round effects. The Bank of England will release new economic forecasts on Thursday, which may provide guidance on future interest rate paths, but the forecast scenarios will also underscore the high degree of uncertainty in the outlook.