BoE: Policy options under energy shock – Deutsche Bank

Deutsche Bank's Chief UK Economist Sanjay Raja outlines how the Bank of England and UK Government might respond to different energy-shock paths. Scenario 1 keeps two cuts to 3.25% and no major fiscal move, Scenario 2 still allows two cuts but more spaced with fuel-duty relief, while Scenario 3 delays easing, raises terminal to 3.5% and triggers broader fiscal support measures.

Rate cuts and fiscal levers by scenario

"The call for policy adjustments will grow. HMT will feel pressure to support households and cut inflation. And the Bank of England will grow more nervous the longer the energy shock lasts."

"In Scenario 1, we would expect our baseline of two rate cuts to come, with the next rate cut likely to come in April/June, followed by a (late) summer rate cut (in either July/Sep). Fiscal policy, we expect, will remain on the sidelines, given the speed in which the shock dissipates."

"In Scenario 2, we still think two rate cuts may be likely. But rate cuts are likely to be spaced further apart, with one likely in summer and another just around the turn of the year. Fiscal policy will most likely be deployed to shield households - particularly in the form of easing fuel duty increases (which is scheduled to rise from August)."

"In Scenario 3, where the energy crisis persists, we expect a two-pronged approach by Government. One, not only would the chances of a fuel duty free extension rise inexorably, but we think the Chancellor may begin to entertain the idea of temporary cut to fuel duty."

"How will the BoE react? We'd expect the next rate cut to come later in the year (Q4-26). And we would expect terminal rate expectations to rise - from 3.25% currently to 3.5%."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)