The Bank of England kept its base rate at 3.75% in April. The decision was linked to the continued Middle East crisis and its effect on policy expectations.
ING now forecasts one rate rise in June, after previously expecting rates to stay unchanged this year. A June increase is described as the base case, but not certain.
Market Pricing And Policy Signaling
Governor Andrew Bailey said markets had moved too far ahead in pricing rate rises. He also described holding rates steady, rather than cutting as might have happened before the war, as a move that tightens policy.
ING expects UK inflation to peak slightly above 4% this year. ING does not forecast inflation to become a long-lasting surge like 2022.
Looking back at the analysis from April 2025, the Bank of England was cautiously signaling a move away from its 3.75% rate. The debate then, driven by a Middle East crisis, was whether a single June hike would be enough to curb inflation. This created significant uncertainty in the interest rate derivatives market.
As we now know, the predicted June 2025 rate hike did happen, but the further hikes priced by the market never came. Inflation peaked around 4.2% in mid-2025 before starting a slow decline, proving the Bank’s view that the surge would not be as persistent as what was seen in 2022. This shows that the market has a tendency to overestimate the Bank’s hawkishness in the face of supply-side shocks.
Trading Implications For 2026
Today, on April 30, 2026, we face a similar situation with rates now at 4.0% and markets again pricing in at least two more hikes this year. With the latest ONS data showing headline CPI inflation proving sticky at 3.8%, the pressure on the Bank is clear. However, last year’s events suggest we should be skeptical of the market’s aggressive pricing.
Derivative traders should consider positioning for an outcome where the Bank of England disappoints hawkish expectations. This could involve selling out-of-the-money call options on SONIA futures, which would profit if rates rise less than currently priced in. This strategy essentially bets that the terminal rate for this cycle is much closer than the forward curve implies.
Another strategy is to look at volatility. Given the repeated pattern of market anxiety followed by central bank patience, implied volatility on short-term interest rate options may be too high. Selling strangles on short-sterling futures could be a way to capitalize if the Bank ultimately chooses to hold rates steady through the summer, letting the market’s current panic subside.
We must also watch wage data, as annual pay growth is still running at a firm 5.5%, which is a key concern for the Bank’s committee members. This stickiness in wages is what fuels the market’s rate hike bets. However, remembering the 2025 playbook, we believe the Bank will ultimately look through the noise and focus on cooling demand without causing a deep recession.
