Bank of England Rate Hikes Expected Amid Energy Price Pressures

Bank of America Global Research has updated its interest rate forecast for the UK, expecting the Bank of England to raise rates twice over the next six months. This is a notable shift from their earlier call for steady policy before a cut in November 2027. The new forecast comes after policymakers struck a firmer tone on inflation risks at last week's meeting.

The energy shock has led to higher oil and natural gas prices, which are expected to have a passthrough effect on domestic inflation and second-round effects that may be somewhat contained but tilted to the upside. Inflation staying near 4% early next year could support wage growth and broader domestic price pressures, raising the likelihood of further policy tightening.

BofA economists expect only two rate increases before the central bank starts cutting rates in 2028 and brings the rate back to 3.5%. Markets are pricing in a 67% chance of a BoE rate hike in November, but BofA said investors may be pricing in too much tightening.