Bank of America is forecasting two interest-rate increases from the Bank of England in 2026, slated for July and September, according to its research note published this week. The firm frames the expected moves as a response to sustained upward pressure on energy costs that it believes could generate second-round inflation effects if left unchecked.
Following the projected 2026 hikes, Bank of America expects a sequence of three quarterly rate reductions beginning in the second quarter of 2027. Those cuts would bring policy rates down to 3.5%, although the bank flags a material downside risk that could push cuts to 3.25% or lead to earlier implementation.
The research note stresses that the balance of risks is sensitive to geopolitical and labour market developments. In particular, Bank of America says that an increased prospect of a peace deal - one that durably reduces oil prices - raises the chance that the BoE limits the number of hikes to one or none. Similarly, a meaningful deterioration in the labour market would also strengthen the case for the central bank to adopt a look-through posture rather than proceed with further tightening.
Bank of America additionally flags risks skewed toward delays in raising rates. The firm cautions that postponement of hikes could reduce market-implied odds of further tightening, effectively reversing some of the curve compression that has, to date, supplemented the central bank's own policy measures.
On timing, the bank sees merit in waiting until September for the second prospective hike. By that point, the Monetary Policy Committee would have access to July inflation data that reflect the impact of the Ofgem price cap reset. Bank of America argues the evidence on direct effects, indirect pass-through and inflation expectations may be clearer once households begin seeing higher gas bills in July.
While the research note lays out a clear baseline - two hikes in 2026 followed by cuts in 2027 - it underscores that the outlook remains conditional on energy prices, geopolitical developments and labour market performance, with each factor carrying implications for policy timing and market pricing.