Bank of America has changed its forecast for Bank of England (BoE) rate cuts, expecting them now in February and April 2026. This update follows recent actions taken by the BoE, prompting many financial institutions to rethink their outlook. Even with these changes in rate cut expectations, inflation remains a significant concern. Current inflation predictions are high and could affect wage-setting, keeping inflation elevated. Wage growth has been steady, adding to this economic issue.

Potential Rate Hikes

Some experts believe the central bank should reconsider its strategy on potential rate hikes. They suggest managing expectations without actually raising rates to avoid an economic slowdown or recession, a view shared by some market analysts. With the Bank of England maintaining its key rate at 5.25% yesterday, the market is now pushing back against expectations for rate cuts in 2025. This means that traders dealing in derivatives should adjust their positions, which were based on early cuts. The focus is now on a reality of higher rates lasting longer, potentially into 2026. This shift in tone is driven by persistent economic data that can’t be overlooked. Recent statistics from August 2025 show UK inflation (CPI) stuck at 3.1%, while wage growth from July remained high at 5.5%. These figures indicate that inflation is becoming entrenched, which may force the BoE to act.

Pound Bullish Signal

For currency traders, this news should be positive for the Pound since the BoE is now among the most hawkish central banks. Positioning for a stronger Sterling against the US Dollar or Euro using call options or futures seemswise for the upcoming weeks, as the interest rate differential now favors the Pound. On the other hand, this outlook is less favorable for UK stocks. High borrowing costs will likely squeeze corporate profits and slow down economic growth. We see potential in using FTSE 100 derivatives, like buying put options, to hedge against or speculate on a market downturn. The risk of a recession aimed at controlling inflation is now a significant concern. Looking back to the early 1980s, we see a similar situation where policymakers had to keep rates high to combat persistent inflation, leading to a serious recession. This historical context suggests that the BoE might choose to prioritize price stability over economic growth, reinforcing the need to be cautious with UK growth-sensitive assets. Create your live VT Markets account and start trading now.

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