The BoE's new central forecast - which assumes energy prices move broadly as markets expect and that spillovers from high energy costs into pay and price-setting are limited - showed inflation rising to 3.2% later this year from a 15-month low of 2.6% in June and staying above target until early 2028 when it would dip below 2%.
This is a softer inflation outlook than in the BoE's last full quarterly forecasts in April, but similar to what it predicted in June.
However, this scenario is based on financial market expectations that the BoE will raise rates in the final quarter of 2026 and again in 2027, in contrast to the expectation among most economists polled by Reuters that the central bank will be able to avoid further tightening.
While the European Central Bank raised interest rates in June, Bailey has said the BoE can afford to keep rates on hold as it had cut rates by less before the outbreak of the U.S.-Iran conflict at the end of February closed the Strait of Hormuz to most oil exports.
The U.S. Federal Reserve kept interest rates unchanged on Wednesday but three members of the Federal Open Market Committee said they would have preferred a quarter-point rise. Chair Kevin Warsh said he had "no tolerance" for inflation.
The BoE's Mann cited a breakdown of a tentative truce between the United States and Iran and a broadening of the conflict this month as the main trigger for her change of view.
"This 'sporadic continuance' of the conflict that I hypothesised last month appears to be the state of play," she said.
Although British inflation is, unusually, below rates in the euro zone and the United States, that largely reflects how regulated household energy bills in Britain lag behind market prices.
For the MPC members who backed a rate hike, the fact that inflation has been above the BoE's 2% target for almost all of the past five years increases the chance of damaging second-round effects.
Others saw no evidence that these risks were materialising and focused more on a weaker labour market, where private-sector pay is now growing at the slowest pace since 2020.
However, Deputy Governor Clare Lombardelli said the absence of second-round effects so far was "informative but not conclusive".
Separately, the BoE raised its estimate of the market impact from the reduction on its balance sheet of hundreds of billions of pounds worth of government bonds, judging it had added a "modest" 0.2-0.3 percentage points to gilt yields since 2022, up from 0.15-0.25 percentage points in a similar assessment last year.
This assessment comes ahead of an annual vote by the MPC in September on the pace of the quantitative tightening programme. In 2025, the BoE slowed the pace at which it reduces its bond holdings to £70 billion ($93 billion) a year from £100 billion. Financial market participants polled by the BoE see a further slowdown by the MPC in September to £50 billion.
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