Bank of America anticipates the Bank of England will preserve the Bank Rate at 3.75% at next weeks policy meeting, while signalling a slower pace of quantitative tightening from October 2026. In BoAs view, the central bank is likely to reduce the annualised QT run-rate to around 30bn - sorry, correction: to 50bn starting in October 2026, down from the current 70bn pace.
The bank expects the vote on rates to split 6-3, with Governor Andrew Baileys policy colleagues Pill, Greene and Mann assessed as the three most likely to vote for a rate increase. BoA also notes a small possibility that Lombardelli could cast a vote in favour of raising the Bank Rate.
According to the analysis, energy prices have risen recently, but there is limited evidence that this shock is producing strong second-round effects or being passed through into core inflation measures and wage growth. The report describes the Bank Rate as remaining restrictive and says financial conditions have tightened further, factors that could weigh on inflation dynamics.
Bank of America expects the tone of the Bank of England to be more hawkish than in July, with the central bank likely to recognise greater upside inflation risks tied to higher energy costs. The bank judges it is plausible the BoE will revise its inflation profile upward to around 3.5% in the fourth quarter, reflecting the recent moves in energy markets.
BoA adds that energy prices are approaching the Bank of Englands adverse scenario, although the bank emphasises the recent price moves are not as persistent as that scenario assumes. Given the uncertainty and the currently limited transmission of the energy shock into broader inflation and wages, BoA does not expect the BoE to issue a strong or unconditional signal that an imminent rate hike is forthcoming.
On the path for policy beyond the immediate period, Bank of America maintains its expectation that rates will remain on hold through 2026, before a single cut to 3.5% in November 2027. The bank cautions, however, that risks of a rate increase later this year or in early 2025 have become more pronounced if convincing evidence of strong second-round effects appears. BoA identifies the November and December meetings this year, and the February meeting next year, as live opportunities for such a shift in policy.
Market pricing currently embeds nearly four rate hikes by this time next year, a level BoA characterises as excessive. For sterling, the bank notes that with such aggressive tightening priced in, the bar for the Bank of England to surprise markets on the upside is high.
Context and implications
The banks assessment centres on two linked judgments: that energy-driven upside risks to inflation have increased, and that, so far, evidence of second-round effects remains limited. That combination supports a more cautious central bank response while leaving the door open to tighter policy if wage or core inflation data pick up materially.
Because the analysis emphasises limited passthrough to wages and core inflation to date, BoA does not expect an immediate shift to a tightening bias, but it flags multiple upcoming meetings where the balance of risks could change if new data alter the transmission picture.