Bank of America Global Research has walked back its call for a Bank of England (BoE) interest rate hike this year, marking a notable shift in the outlook for UK monetary policy. The U.S. bank now expects the BoE's benchmark Bank Rate to remain at 3.75% for the rest of 2023, after May inflation data held steady at 2.8%—below both economists' forecasts and the central bank's own projections.
The decision comes as the BoE held rates at its June meeting, and BofA now describes the next move as a "close call." Its base case is "no hikes," though the bank acknowledges that risks still tilt toward another increase if inflation flares up again or if so-called "second-round effects" emerge—where workers and businesses embed current price rises into wages and pricing, keeping inflation sticky.
Why Inflation Data Matter
Inflation in the UK has been stubbornly high, but May's reading of 2.8%—unchanged from April—offered some relief. Lower energy costs and broader cooling in price pressures helped keep the figure in check. That gave the BoE room to pause, and BofA to revise its forecast. Still, traders remain skeptical. According to LSEG, a financial data firm, markets are still pricing in at least one quarter-point rate hike by the end of the year.
BofA also trimmed its expectations for future rate cuts. The bank now sees just one quarter-point cut in November 2027, suggesting that even if the BoE pauses now, forecasters are increasingly treating "higher for longer" borrowing costs as the more realistic backdrop.
What This Means for Investors
For everyday investors, the key takeaway isn't whether BofA or the markets are right about the final decision. It's that many everyday interest rates—like those on fixed-rate mortgages and savings accounts—are built off where markets think the BoE is heading. When traders price in "one more hike," that expectation feeds into short-term wholesale rates, such as the SONIA swap curve, which lenders use to price fixed-rate mortgages and savings deals.
If future inflation readings look more like May's 2.8% and markets drop the extra-hike premium, mortgage and savings quotes could ease even without a BoE cut. Conversely, if inflation heats up and markets add tighter policy back in, those products can reprice higher quickly, before the BoE changes Bank Rate at all.
This dynamic is especially relevant for investors holding UK-focused assets. The FTSE 100, for instance, has been sensitive to inflation and rate expectations, as seen in recent moves when oil prices retreated and eased inflation fears. Similarly, the British pound's value against the dollar can shift with rate expectations, affecting returns for international investors.
Broader Context
The BoE's rate path is part of a global trend. Central banks in the U.S., Europe, and elsewhere have been grappling with inflation that has proven stickier than expected. The Federal Reserve, for example, has signaled it may keep rates higher for longer, while the European Central Bank has also raised rates. In the UK, the BoE has been particularly aggressive, but the latest data suggests it may have room to pause.
For investors, this means staying attuned to inflation reports and central bank commentary. The next key data point will be the June inflation reading, due in July, which could either reinforce the pause narrative or reignite rate hike bets.
In the meantime, BofA's shift is a reminder that forecasts can change quickly. Investors should focus on the underlying trends—like inflation and wage growth—rather than any single bank's call.
