Bank of America has revised its view on the Bank of England's next move, dropping a prior call for a March interest-rate reduction and instead expecting the central bank to leave its policy rate unchanged amid a recent surge in energy prices.
In research notes, strategists led by Mark Capleton wrote: "We change BoE call from a cut to hold in March, given recent rise in energy prices," and anticipated that the decision would carry a 7-2 majority in favor of holding rates, while acknowledging "risks for 6-3."
The bank now expects the BoE's benchmark rate to remain at 3.75% at the upcoming meeting, reflecting a more cautious, posture as policymakers weigh how the energy shock might affect the inflation trajectory. BofA's team said the uptick in energy costs could interrupt the disinflation path even though underlying domestic data remain relatively soft.
On labor market indicators, the strategists noted that unemployment has inched higher and wage growth has eased. Still, they warned the energy shock carries the potential to lift inflation expectations and complicate the expected decline in inflation rates.
Looking further ahead, Bank of America retains a view that rate cuts are still likely later in the year, but it has shifted the timing. "Assuming energy price moves reverse in the next couple of months, we expect two cuts in June and September (vs March/June before)," the strategists wrote.
Crucially, the bank emphasised that this updated path is held with low conviction and hinges on how the recent energy moves unfold. "The size but mainly the persistence of the shock matters for the impact on inflation expectations and BoE's reaction function. We could see an earlier cut in April if energy price moves reverse by then, but risks are for further delays and lesser number of cuts this year if the conflict is prolonged," the strategists added.
In an even more severe scenario, BofA said ongoing energy-driven inflation could prompt questions about the necessity of further rate increases, though it noted that the bar for moving into a tightening cycle remains high.
On communications, the bank expects the BoE to maintain an easing bias while underlining elevated uncertainty. Policymakers are likely to stress that both the timing and scale of any future rate reductions will depend on the path of inflation, especially in light of geopolitical developments that influence energy markets.
Market ramifications differ across asset classes. In rates markets, BofA observed that cuts previously priced in for 2026 have been fully unwound in the wake of the energy shock. The outlook for short-end yields, the strategists said, will depend heavily on how large and persistent energy price movements prove to be.
With regard to foreign exchange, the bank expects the BoE meeting itself to exert only a limited direct effect on sterling. Instead, the currency is likely to remain tied to broader market dynamics, including developments in oil prices.
Clear summary
Bank of America has shifted from forecasting a March cut to expecting the BoE to hold rates at 3.75% due to rising energy prices. Strategists led by Mark Capleton predict a 7-2 hold vote, maintain that cuts could still come in June and September if energy moves reverse, but flag low conviction and a reliance on how persistent the energy shock proves.
Key points
- BofA drops its March BoE cut call and now expects a hold at 3.75%.
- Strategists led by Mark Capleton foresee a 7-2 vote in favor of holding, with "risks for 6-3."
- BofA still models two cuts later in the year (June and September) if energy prices reverse, but stresses low conviction.
Risks and uncertainties
- Persistence of higher energy prices - could push up inflation expectations and delay or reduce the number of cuts, affecting rates markets and energy-sensitive sectors such as materials and industrials.
- Prolonged geopolitical conflict - could sustain energy inflation and create downside risk for the timing of easing, influencing inflation dynamics and central bank communication.
- Market repricing - cuts previously priced for 2026 have been unwound, and future short-end rate moves will depend on the magnitude and longevity of energy price shifts, impacting fixed income and FX markets.