The Bank of England could lay the groundwork for a series of interest rate hikes this year, as price shocks triggered by the war in Iran continue to ripple through the global economy, according to City analysts.

Analysts across financial firms in the City broadly expect the Bank to leave interest rates unchanged at 3.75 per cent. However, some traders are concerned that additional policymakers may align with two hawkish members of the nine-strong Monetary Policy Committee (MPC), Huw Pill and Megan Greene, who both voted to raise rates at the previous meeting.

Strategists at Mizuho have warned that committee member Catherine Mann may further deepen the divide by backing a rate hike, while deputy governor Clare Lombardelli has also been identified as a potential hawkish voice.

The Bank has been contending with higher and more persistent inflation driven by a surge in energy prices linked to the war in Iran. In a report released yesterday, the independent think tank NIESR said inflation would likely remain above the Bank's two percent target until 2029, even under a benign scenario in which hostilities ease and oil prices stabilize at $74 per barrel.

A 6-3 or 5-4 split on the MPC could unsettle traders and signal further rate hikes ahead. The yield on two-year gilts — which reflect market expectations for interest rates — already suggests that investors anticipate up to three hikes on the horizon.

"Mann has been increasingly vocal about upside inflation risks and I wouldn't be surprised to see her vote for a hike," said Mizuho's Evelyne Gomez-Liechti.

"The hawkish risk comes from Lombardelli, who remains a potential swing vote if concerns around inflation persistence continue to build," Gomez-Liechti added.

MPC members remain mindful of the spiralling effects of higher wages and inflation that followed Russia's full-scale invasion of Ukraine in 2022, which pushed the consumer price index (CPI) to a peak above 11 per cent.

While the MPC has indicated that a weakening jobs market could dampen price pressures in the UK economy, Mann has cautioned that elevated inflation expectations among businesses and households could necessitate an "activist hike." Lombardelli also said in June that if inflation continues to exceed two per cent, the Bank could be compelled to "respond more forcefully."

Diverging Views on Rate Path

Some City firms, including Peel Hunt and Berenberg, argue that the Bank's next move will be to cut interest rates following a series of decisions to hold rates at 3.75 per cent. Berenberg's forecast suggested a cut could arrive as early as December.

"We think US President Donald Trump wants to avoid high oil prices because high petrol prices would damage the Republican party's chances in the 3 November mid-term elections," said Berenberg economist Andrew Wishart. "If our reasoning holds, the Bank of England should turn more dovish over the remainder of the year, resume interest rate cuts in December, then lower the policy rate twice more to three per cent in mid-2027."

Peel Hunt's Kallum Pickering agreed that a narrower split on the MPC would be the "clearer signal" that rate hikes were imminent, though he described this as a "tail risk" rather than a central expectation.

The trajectory of monetary policy hinges heavily on oil prices, which briefly touched $100 per barrel after an Iran-backed militia fired on shipments in the Gulf region. The Strait of Hormuz, through which roughly a fifth of global oil consumption normally passes, remains a focal point for energy markets; any sustained disruption there would reverberate across import-dependent economies including the UK.

UBS said it expects the Bank to lower near-term inflation forecasts, as data released last week indicated that price growth pressures had eased by the end of the first half of the year. In April, the Bank projected inflation would edge towards four per cent by the end of this year, even assuming that trade through the Strait of Hormuz resumes freely.

Traders vs the MPC

Analysts are also closely watching the Bank's forecasting approach. For its April Monetary Policy Report, the Bank presented three contrasting scenarios for the UK economy based on different outcomes to tensions in the Middle East.

Morgan Stanley researchers have predicted that the Bank will return to publishing a central forecast while still offering two "risk scenarios," which would express "some desire to return to simplicity."

The Bank's forecasts and language have grown increasingly significant for traders, with the MPC having previously attributed a tightening of inflation to financial markets pricing in rate hikes.