BofA Expects BoE Rate Hikes Before Cuts
Bank of America now forecasts that the Bank of England will raise interest rates twice before shifting toward rate cuts. The revised outlook reflects concerns that persistently high energy prices could trigger second-round inflation effects across the U.K. economy.
Updated Interest Rate Path
According to BofA strategist Agne Stengeryte, the bank expects two 25 basis point rate hikes in June and July 2026. This would be followed by three 25 basis point cuts in April, July, and November 2027, bringing the Bank Rate down to around 3.50%.
However, the firm noted that risks are tilted toward a slightly lower terminal rate of 3.25%.
Energy Prices Driving Policy Outlook
The updated forecast is largely driven by expectations that elevated energy prices—linked to ongoing Middle East tensions—will persist throughout 2026. This environment may push the Bank of England’s Monetary Policy Committee to act preemptively to prevent inflation from becoming more deeply embedded in the economy.
At the same time, BofA highlighted the possibility of a more limited tightening cycle if economic conditions improve.
Market Reaction and Yield Curve Expectations
BofA also anticipates notable shifts in U.K. rate markets. The firm expects the front end of the yield curve to flatten more sharply than current market pricing suggests.
Initially, markets could react negatively when the first rate hike is delivered. However, as economic growth weakens and the central bank adopts a more dovish stance, the curve may steepen again over time.
Trading Strategy and Market Positioning
To reflect this outlook, BofA favors a strategy involving paying July 2026 rates while receiving April 2027 SONIA-linked positions. This approach aims to benefit from near-term curve flattening ahead of a potential policy pivot toward easing in 2027.
