BoE MPC member Huw Pill said he does not expect second-round inflation effects to be as strong as in 2022. He said these effects are behavioural and depend on what the BoE does next.

He said labour market weakness means second-round effects are likely to be weaker than in 2022. He also said it is not clear the labour market is as loose as it was during the oil price spikes in 2008 or 2011.

He said the latest GDP data shows some robustness. He warned against inflation dynamics becoming unmoored.

He said tighter financial conditions do not remove the need for the BoE to decide whether to raise rates. He said a prompt but modest increase in rates would be advantageous.

He said waiting until market pressure forces action would be more challenging for the BoE. He said he cannot say whether any rise would be temporary or lead to a rate plateau.

He said fiscal conditions and the global situation are affecting long-term market rates. He said these factors also influence the inflation outlook.

The Bank of England is signaling that it prefers a prompt but modest increase in interest rates to manage inflation expectations. We believe this is a clear sign to prepare for a rate hike sooner rather than later. Acting before being forced by the market is being presented as the less painful path.

This view is strengthened by recent data showing UK inflation for April 2026 came in at 3.1%, which is still stubbornly above the 2% target. The Bank cannot afford to let inflation expectations become unmoored, as we saw during the crisis of 2022. This makes a preventative rate move in the coming weeks highly probable.

However, the Bank acknowledges that the labor market is weaker now than it was a few years ago. Recent ONS figures show UK unemployment edged up to 4.5% in the first quarter of 2026. This weakness suggests wage pressures and second-round inflation effects will be less severe than in 2022, justifying a “modest” hike rather than an aggressive one.

Looking back, the rapid succession of rate hikes we saw through 2022 and 2023 was a response to inflation that ultimately peaked over 11%. The current economic picture, with Q1 2026 GDP growing a soft 0.2%, is far more fragile. The BoE wants to avoid repeating the past but is constrained by a weaker economy.

For our positioning, this means the front end of the SONIA curve should be repriced higher. We should anticipate at least a 25 basis point hike being fully priced in for the next MPC meeting. Options strategies that benefit from a small, near-term rise in short-term rates appear advantageous.

In the foreign exchange markets, this hawkish tilt should offer modest support for the Pound. We see potential in buying short-dated GBP call options against the Euro and the Dollar. The emphasis on a “modest” move suggests a sharp rally is unlikely, making strategies with defined profit targets sensible.

The Bank is clear that it cannot say if a rate rise would be temporary or the start of a new plateau. This data-dependent uncertainty means we must watch incoming wage and price data closely. Any sign of persistent inflation would suggest more hikes are on the table, while further labor market weakness could make this a one-and-done move.