Bank of England expected to hold rates at 3.75% next week says BofA

Bank of America anticipates the Bank of England will maintain the Bank Rate at 3.75% during its upcoming meeting, projecting a deceleration in quantitative tightening to £50 billion starting in October 2026 from the present £70 billion pace. The bank expects a close vote of 6-3, with Pill, Greene and Mann voting for a rate increase, though Lombardelli may also support a hike.

While energy prices have increased, the analysis suggests limited evidence of second-round effects or price transmission to core inflation and wage growth. Despite rising energy costs, the Bank Rate remains restrictive and financial conditions have become even tighter. Bank of America anticipates a more hawkish tone compared to July, with the central bank acknowledging heightened upside inflation risks due to energy price hikes.

The Bank of England may adjust its inflation forecast upward to around 3.5% in the fourth quarter. Energy prices are nearing the Bank of England's adverse scenario but are not yet persistent. The bank does not foresee a robust or unconditional indication of an imminent rate hike due to uncertainty and limited second-round effects.

Bank of America retains its view that rates will stay unchanged through 2026, followed by a reduction to 3.5% in November 2027. The bank notes growing risks of a hike later this year or early next year if strong second-round effects emerge, with November, December, and February identified as potential meetings. The bank believes the current market pricing of nearly four hikes by next year is overly optimistic.

For the pound, Bank of America posits that with nearly four hikes already priced in, the bar for the Bank of England to surpass market expectations is high.