ABN AMRO expects the Bank of England’s Monetary Policy Committee to deliver one further ‘insurance’ rate rise over the summer, though it assigns less conviction to that call than before. The bank points to a shift towards a more dovish tone compared with the MPC’s hawkish communication at the March meeting, suggesting policy guidance has softened as the cycle matures.
After that prospective move, ABN AMRO anticipates a return to a wait-and-see stance as energy supplies gradually normalise in Q3. With Bank Rate already described as restrictive, it projects that cuts would not restart until late 2026, framing the path as a pause following a final hike and then an extended period of restraint before easing begins.
MPC’s Tone Softens as Policy Nears a Turning Point
We are seeing a more cautious tone from the Monetary Policy Committee, moving away from its more aggressive stance earlier in the year. Recent data showing inflation easing to 3.5% in April strengthens the case that the peak for interest rates is very close. This suggests the market, which is currently pricing in a full 25 basis point hike by August, may be overly aggressive.
While we still lean towards one final “insurance” hike this summer, our conviction is lower. We believe derivative trades that profit from falling volatility, such as selling strangles on SONIA futures for autumn delivery, could be effective. This strategy benefits from the view that after one potential final move, the central bank will enter a prolonged holding period.
Rate Cut Timing and Investment Strategies
Looking further ahead, the focus should pivot towards the timing of rate cuts. With Q1 GDP growth coming in at a stagnant 0.1%, the restrictive nature of current policy will likely force the Bank’s hand sooner than many expect. We see value in positioning for rate cuts beginning in late 2026.
This can be expressed by entering into forward-starting interest rate swaps, where we would agree to receive a fixed rate for a period starting in early 2027. Historically, once the UK economic outlook darkens, the Bank of England has often cut rates more quickly and deeply than initially forecast. This suggests positioning for this turn now, before it is fully priced in, is the prudent move.
