LONDON, April 30 (Reuters) – Due to uncertainty caused by the Iran war, the Bank of England moved away from a single economic forecast in its April 2026 Monetary Policy Report and instead produced forecasts for three separate scenarios.
Following is a summary of the three scenarios:
SCENARIO A – LEAST INFLATIONARY
Oil and gas prices follow the paths implied by futures curves and household spending falls by more than would be implied by the historical relationship with real incomes as households prioritise spending instead.
The combination of a relatively short-lived energy shock and weakness in demand is assumed to be enough to prevent any second-round effects in response to the shock.
Inflation peaks at a little over 3.5% at the end of 2026 before falling back to a little below 2% in around three years’ time.
Interest rates over the next three years would need to be higher than markets expected in February.
SCENARIO B
Energy prices peak at similar levels to Scenario A but remain higher. Households’ saving behaviour is assumed to be similar to the past. Second-round effects are modest.
Inflation peaks at a little over 3.5% at the end of 2026 before falling back to close to 2%.
Interest rates over the next three years would need to be higher than markets expected in February.
SCENARIO C – MOST INFLATIONARY
Energy prices rise more sharply than in Scenario A or B and stay high for a prolonged period. This causes much stronger second-round effects than in Scenario B.
Inflation peaks at more than 6% in early 2027 and is around 2.5% – above its target – at the end of the scenario in three years’ time.
Bank Rate would need to be “materially higher” than financial markets expected in the 15 days to April 22 in order to bring inflation back towards target, causing weaker growth and higher unemployment.
(Writing by David Milliken)
((david.milliken@thomsonreuters.com))
Keywords: BRITAIN BOE/SCENARIOS
