TD Securities economists expect the Bank of England to keep Bank Rate at 3.75% and to vote unanimously. They anticipate a continued wait-and-see approach to assess how the conflict affects domestic prices beyond energy.
They expect limited changes to the policy statement, including wording that CPI inflation will be higher in the near term. They also expect the MPC to note increased risk of second-round effects.
Policy Outlook And Projections
The economists expect the Bank’s projections to show higher inflation in Years 1 and 2. They expect slightly stronger GDP growth at first, followed by weaker growth later.
They forecast Year 2 inflation to be slightly above 2%, compared with a previous projection of 1.8%. They also see a risk that Year 3 inflation rises above the February forecast of 2.0%.
They expect the MPC to place more focus on scenario analysis in its projections. One possible scenario involves more severe energy price pressures, with higher inflation and weaker GDP growth.
Looking back to 2025, we recall the Bank of England holding rates at 3.75%, signalling a “wait-and-see” approach that turned out to be a hawkish pause before more hikes. Those further increases were necessary as inflation proved stickier than anticipated, pushing the Bank Rate to a cycle peak of 5.25%. Today, the debate has completely shifted from how high rates will go to when they will be cut.
Trading Implications For Rates Markets
The concerns from last year about inflation remaining above target have largely materialised, despite the aggressive policy tightening that followed. The latest data from the Office for National Statistics shows UK CPI is still running at 2.4%, which is above the 2% goal. This stubbornness is now being weighed against a much weaker growth backdrop than was forecast, with the economy barely expanding over the last two quarters.
This new reality means derivative traders should be focused on the timing and pace of monetary easing. While last year was about pricing in a prolonged hold or further hikes, the SONIA futures market now implies the Bank will begin cutting rates within the next six months. The primary play is positioning for this pivot, with swaps and options structured around key MPC meeting dates later this year.
The old emphasis on scenario analysis remains highly relevant, creating opportunities for those trading volatility. Given the conflicting data of sticky inflation and near-zero GDP growth, implied volatility on short-sterling options has been elevated. This suggests that strategies designed to profit from sharp moves in either direction, rather than a specific directional bet, could be advantageous in the coming weeks.
