Investing.com — The Bank of England maintained its policy rate at 3.75% in an “active hold” decision, with analysts divided on whether the central bank will need to raise rates later this year or remain on hold through 2027.
The 8-1 vote, with one member favoring a 25 basis point hike, came as the BoE reintroduced scenario analysis to assess potential outcomes from recent energy price spikes. Governor Andrew Bailey emphasized that the decision represented the committee’s best judgment given a range of possible outcomes, rather than a passive wait-and-see approach.
Market participants are now parsing the different analyst interpretations to gauge the likely path for UK monetary policy.
Citi analysts view the decision as an “active hold” strategy that keeps the bank on hold through 2026 despite a hawkish minority becoming more vocal. The firm notes the reintroduction of scenario analysis as the most notable feature of the decision, providing frameworks to assess policymaker decision-making. While Citi acknowledges hawkish risks are building, the committee appears split over how much weight to assign each scenario.
The firm assumes that preference towards the middle scenario implies a bank on hold for the foreseeable future, even as the market price still does some heavy lifting with 40 basis points of hikes priced to year-end.
Goldman Sachs maintains its forecast for unchanged Bank Rate this year, followed by cuts back to 3% in 2027. The firm notes that Governor Bailey focused on changes in policy simulations since February rather than the implied level of Bank Rate, arguing that reversing out assumed cuts would largely accommodate scenarios A and B without further rate increases.
Goldman Sachs expects the BoE to remain on hold given its strategists’ forecast for declines in energy prices and the likelihood of further labor market weakening. However, the firm sees a low hurdle for the BoE to deliver a couple of hikes during the summer if energy prices remain elevated for longer or inflation data point to stronger passthrough.
Bank of America expects hikes in June and July, with risks of delay or fewer increases. The firm notes that the BoE’s Scenario B, which the MPC viewed as most likely, saw inflation at 2% in the medium term under market pricing with one to two hikes priced in.
Given expectations of higher energy prices persisting through the year, BofA continues to expect hikes as insurance to guard against second-round effects. The firm then expects three quarterly cuts from the second quarter of 2027 to 3.5%. However, BofA acknowledges that risks of delays on hikes have increased after the lack of explicit guidance on June.
UBS continues to expect the next move to be a cut in 2027, not a hike. The firm views the outcome as consistent with expectations of the Bank remaining on hold over the coming months. UBS notes that during the press conference, Governor Bailey’s comments suggested that Bank Rate hikes would be more likely only in the more adverse, persistent energy scenario.
The firm now expects cuts in February and April 2027, pushing back previous expectations. UBS acknowledges two-sided risks, with a larger-than-expected growth fallout potentially bringing rate cuts forward, while any signs of second-round effects would likely delay interest rate cuts further.