An ING economist said recent UK GDP strength may be overstated and that growth may slow into the summer. Inflation is expected to rise towards 4% beyond July while private sector wage growth is closer to 3%, which would reduce real wages.
Higher energy prices are expected to add to recent increases in unemployment. Weaker corporate pricing power is also described as a drag on the economy.
ING expects the Bank of England to keep Bank Rate unchanged at 3.75% throughout 2026. The decision is described as a close call, including ahead of the June meeting.
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We believe the market is mispricing the probability of a Bank of England rate hike in the coming months. The underlying economic picture is deteriorating despite some recent positive headlines. Traders should therefore position for a more dovish stance from the central bank than is currently expected.
The latest data from early April supports this view of a slowdown, with the ONS reporting that CPI inflation has reached 3.9%, while average weekly earnings growth has slowed to just 3.1%. This confirms that real wages are falling, putting a significant strain on household budgets. With March retail sales figures also showing a 0.5% decline, the pressure on the consumer is becoming undeniable.
This growing weakness is why we see the Bank of England holding rates at 3.75% through its June and subsequent meetings this year. Rising unemployment, which recently ticked up to 4.4%, and weakening corporate pricing power make a rate hike a significant policy risk. The Bank will not want to tighten monetary policy into a potential recession.
For derivatives traders, this suggests buying December 2026 SONIA futures could be a prudent move. This position would profit as the market unwinds its expectations for a rate hike, aligning with our view of a steady Bank Rate. The current forward curve appears too aggressive given the challenging economic headwinds.
We also see potential for Sterling to weaken, particularly against the US Dollar, as policy divergence grows. Buying GBP/USD put options offers a way to position for a decline in the pound if the Bank of England’s inaction contrasts with a more hawkish Federal Reserve. This trade benefits from the UK’s weaker growth and inflation dynamic.
This situation is reminiscent of the caution the Bank showed in late 2025 when it paused its cycle despite a temporary inflation scare. Looking back, that proved to be the correct decision as growth faltered. We expect a similar data-dependent and cautious approach this summer.
The key risk to this strategy would be an unexpected acceleration in services inflation or a surprise jump in the next wage growth report. Traders should therefore monitor the upcoming May labour market data very closely. Any figure above 3.5% could cause the market to quickly re-price the odds of a summer hike.
