Three Scenario Framework
Scenario 2 also keeps two cuts to 3.25%, but with wider spacing. One cut is placed in summer and another around the turn of the year, alongside support via fuel duty, which is scheduled to rise from August. Scenario 3 assumes the energy crisis persists, leading to delayed monetary easing and larger fiscal support. The next rate cut is pushed to Q4-26, while terminal rate expectations rise from 3.25% to 3.5%, and the Government may extend a fuel duty freeze and consider a temporary cut to fuel duty. The recent spike in energy prices is making everyone nervous about the path for UK policy. With Brent crude futures pushing past $92 a barrel last week and the latest ONS data showing inflation unexpectedly ticking up to 3.1%, the pressure is on. This uncertainty creates a branching path for interest rates in the coming months. How this energy situation unfolds will directly impact the Bank of England’s decisions on rate cuts. We are looking at three distinct possibilities, ranging from a quick resolution to a prolonged crisis. Each scenario demands a different strategy for positioning in the rates market.Rates Market Positioning
If we believe this energy shock will fade quickly, then the baseline for two rate cuts remains in play. Looking back at the policy easing we saw in 2025, a similar path would suggest positioning for a cut in the second quarter, likely June. This implies that current market pricing for a delayed cut is too cautious. However, if the shock lasts longer, the timing of rate cuts will be pushed out, with fiscal help like fuel-duty relief becoming more likely. In this case, we would expect only one cut this summer and another toward the end of the year. This suggests selling front-end rates contracts to bet against the market’s more optimistic easing schedule. Should the energy crisis get worse, the entire outlook changes, making a play on volatility attractive. The Bank of England would likely delay any cut until the final quarter of 2026, and we could see the expected terminal rate climb from 3.25% to 3.5%. This divergence in potential outcomes means options on SONIA futures, which profit from large interest rate moves in either direction, could be a valuable tool. Create your live VT Markets account and start trading now.
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