Rabobank said it expects the Bank of England’s Monetary Policy Committee to keep Bank Rate at 3.75% at the April meeting, with a cautious policy stance. It linked this view to markets stabilising in recent weeks.
It cited weaker domestic demand and already restrictive policy compared with 2022. It also said conditions are less likely to produce second-round effects.
Energy Prices And Near Term Inflation
The bank noted that energy prices have been lower than expected, even with the Strait of Hormuz still closed. It said this could lead to a small downward revision to its near-term inflation forecast if it persists.
Rabobank said a smaller inflation impulse would reduce the risk of entrenched inflation, while the outlook remains uncertain. It still expects one further rate rise, but does not expect a renewed rate-hiking cycle.
Looking back at the analysis from last year, we can see the Bank of England was expected to hold rates at 3.75% amid concerns over inflation, even with weaker demand. Now, in April 2026, the conversation has shifted entirely from hiking to the timing of potential cuts. The core dilemma of balancing inflation with a weak economy remains the central issue for the MPC.
The recent inflation data adds a layer of complexity to our strategy. The March 2026 CPI figure came in at 2.9%, slightly above the 2.7% that was forecast, showing that price pressures are proving stubborn. This sticky inflation makes the Bank of England hesitant to signal an immediate rate cut, echoing the “vigilant stance” we saw them adopt in 2025.
Strategy For Rates Volatility
On the other hand, the domestic economy is showing clear signs of strain, a continuation of the trend identified last year. The latest figures for Q1 2026 show GDP growth at a sluggish 0.1%, barely avoiding a recession. This weak performance puts significant pressure on the MPC to ease its restrictive policy to stimulate demand.
Given this conflict between sticky inflation and stagnant growth, trading interest rate volatility appears prudent. We should consider using options on SONIA futures, such as straddles, to profit from a significant rate move in either direction. The market is currently pricing in two full rate cuts by year-end, and any deviation from this path will likely cause a sharp repricing.
For those with a directional view, the weak growth backdrop suggests positioning for lower rates is the logical path forward. We can build positions in interest rate swaps or go long on SONIA futures contracts to benefit from eventual BoE cuts. However, the recent inflation data means we should be cautious about the timing, as the first cut may come later than the market currently anticipates.
A key difference from last year is the energy market, as the reopening of the Strait of Hormuz has helped stabilize prices. While in early 2025 this was a major uncertainty driving inflation forecasts, it is now a tailwind for disinflation. This supports the long-term view that the Bank will have to cut rates to support the economy.
