Bank of America has updated its view on Bank of England (BoE) policy, predicting two interest rate increases prior to an easing cycle the following year as energy costs continue to threaten a re-acceleration of inflation.
In a note to clients, BofA rates strategist Agne Stengeryte set out the bank's economists' latest forecast: two 25 basis point increases in June and July 2026, followed by three 25 basis point reductions in April, July and November 2027. Under this path the Bank Rate would reach 3.50% at the peak.
The firm also cautioned that risks are skewed toward a terminal rate of 3.25%, reflecting uncertainty around how persistent the inflationary impulse will be.
BofA framed its revision around the expectation that energy prices - pressured by the Middle East conflict - will remain elevated through 2026. That persistence, the bank said, raises the prospect of second-round inflation effects filtering through to the broader U.K. economy and places the Monetary Policy Committee in a position where tightening could be required as a precaution.
At the same time, BofA noted that if conditions improve, the BoE could opt for a one-and-done move rather than a multi-step tightening campaign.
On the market implications of its forecast, BofA argued the front end of the U.K. rates curve is likely to flatten more sharply than current forward pricing suggests. Stengeryte warned that the market may initially overreact in a bearish way when the BoE delivers a first hike, but then experience more steepening later if and when the BoE shifts more dovish in recognition of the weaker growth prospects.
To express this view in markets, BofA's preferred trade is paying July 2026 against receiving April 2027 MPC-dated SONIA. The position is intended to capture the anticipated near-term flattening of the curve ahead of an eventual pivot toward easing in 2027.
Clear summary
Bank of America now projects two 25bp BoE hikes in June and July 2026, then three 25bp cuts in April, July and November 2027, bringing the Bank Rate to 3.50%, with risks skewed toward a 3.25% terminal rate. The call rests on an expectation of elevated energy prices through 2026 due to the Middle East conflict, raising the risk of second-round inflation, and includes an expressed market trade to capture an expected front-end flattening before easing.