Bank of England to Hold Rates at 3.75% Next Week, BofA Predicts

Bank of America expects the Bank of England's Monetary Policy Committee (MPC) to keep its main Bank Rate on hold at 3.75% at its upcoming meeting next week. In an analysis published September 11, the bank's economists also projected the central bank would announce a slowdown in its quantitative tightening (QT) program.

A Divided Decision

Bank of America (BofA) forecasts a divided 6-3 vote to maintain the current rate, with MPC members Catherine Mann, Megan Greene, and Huw Pill likely dissenting in favor of a rate increase. The rationale for the hold, according to BofA, is that financial conditions are already restrictive and there is currently limited evidence of significant second-round effects from the recent energy price shock passing through to core inflation and wage growth.

While the base case is a hold, BofA noted a small possibility that newly appointed member Sarah Breeden (referred to in the source by her predecessor's name, Lombardelli) could also vote for a hike.

Hawkish Tone and QT Taper

Despite the expected pause, analysts anticipate the BoE will adopt a more hawkish tone compared to its July meeting. This shift is expected to acknowledge the increased upside risks to inflation stemming from higher energy prices. The central bank may revise its fourth-quarter inflation forecast upward to around 3.5%.

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Alongside the rate decision, BofA projects the BoE will reduce the pace of its quantitative tightening. The forecast is for a reduction in the balance sheet runoff to £50 billion starting in October 2026, down from the current pace of £70 billion.

Market Implications

BofA's analysis suggests that current market pricing, which implies nearly four rate hikes by next year, is "excessive." With such aggressive tightening already factored in by investors, the bar for the Bank of England to deliver a hawkish surprise that would further strengthen the pound is high.

Looking further ahead, BofA maintains its view that the Bank Rate will remain on hold through 2026, followed by a cut to 3.5% in November 2027. However, it notes that the risk of a hike later this year or in early 2027 has become more pronounced, identifying the November, December, and February meetings as "live" if strong evidence of persistent inflationary pressures emerges.