BoE to hold rates for rest of 2026

Excerpt

For now, we are sticking with our call for no change in rates from the Bank of England for the rest of the year. This view is predicated on the Iran war - a peaceful resolution in the not-too-distant future should be enough to temper second-round inflation effects and trigger a rapid unwinding in the market's rate hike expectations. We also think the slack evident in the jobs market will be enough for the doves to get their way. With wage growth soft and unemployment drifting higher, we don't see conditions conducive to material second-round effects, certainly nowhere near the extent seen after the 2022 energy price spike.

For the pound and gilt markets, the clearest signal to watch this week is likely to be the bank's vote distribution. A 7-2 split alongside remarks that play down the upside inflation risks from the energy spike could see a retreat in UK rate hike expectations and take some shine off the pound. Conversely, a 6-3 vote combined with forecasts showing inflation peaking closer to 4% than 3% would likely be bullish for sterling, while lifting yields at the short end of the curve.

Thursday's meeting also carries the bank's annual review of quantitative tightening, but we don't expect this to be a major market mover - any confirmation of a modestly slower pace of active gilt sales could suppress yields in the long-end, though this will be overshadowed by the vote split and inflation guidance.