Is the BoE’s rate-cut cycle giving way to hikes?

The Bank of England is poised to begin its rate hike cycle in the fourth quarter of 2026, according to Citigroup Research. This shift comes after a period of interest rate cuts, driven by rising oil and gas prices due to conflict in the Middle East, and higher inflation. The Monetary Policy Committee will maintain rates at 3.75% for the month, but three members - Pill, Greene, and Mann - are forecast to dissent and vote for a 25-basis-point increase.

Citi expects the hikes to take place in November and February, reversing their earlier prediction of a hold with upside risk if the conflict in the Strait of Hormuz persisted. Citi has revised up its inflation forecast, anticipating it to peak at an average of 3.5% in Q4 2026 and 3.6% in Q1 2027, compared to the Bank of England's projection of 3.2% at the end of 2025.

Despite the impending hikes, Citigroup maintains its forecast for two 25-basis-point cuts at year-end, expecting policy to be restrictive and willing to resume cuts once conditions allow. Bank of England Governor Andrew Bailey cautioned against interpreting a rate hike as a sign of the bank edging closer to a hike, as it could undermine the credibility of future statements.

Citi believes current market pricing anticipates four Bank of England hikes by next summer, which it deems excessive given the central bank's historical tolerance for inflation above target. Nonetheless, given the severity of inflation and recent growth improvements, some tightening is necessary and likely, according to Citigroup.

The broker also anticipates the Bank of England to scale back quantitative tightening to £50 billion, aligning with market expectations, while maintaining sales of long-dated gilts, despite some markets expecting a halt.