Investing.com — Bank of America now expects the Bank of England to raise interest rates twice before pivoting to cuts, as high energy prices raise the risk of second-round inflation effects feeding through to the broader U.K. economy.
BofA rates strategist Agne Stengeryte told clients in a note that the bank’s economists now forecast two 25 basis point hikes in June and July 2026, followed by three 25 basis point cuts in April, July and November 2027, which would take the Bank Rate to 3.50%.
The firm noted risks are skewed toward a terminal rate of 3.25%.
The revised call reflects BofA’s expectation that elevated energy prices, due to the Middle East conflict, will persist through 2026, prompting the Monetary Policy Committee to act as a precaution against inflation becoming more entrenched.
The firm flagged the possibility of a one-and-done scenario, however, should conditions improve.
On market dynamics, BofA argued that the front end of the U.K. rates curve is likely to flatten more sharply than current forward pricing implies.
Stengeryte wrote that “the market may initially overreact in a bearish way when the BoE delivers a first hike, but more steepening later if and when the BoE shifts more dovish in recognition of the weaker growth prospects.”
BofA’s preferred trade expression is paying July 2026 against receiving April 2027 MPC-dated SONIA, a position designed to capture the expected near-term flattening ahead of an eventual pivot toward easing in 2027.