Nomura economists expect the Bank of England to keep interest rates unchanged next week. They estimate that $100 oil could add about 0.6 percentage points to UK CPI through higher petrol costs. They set out four channels for energy price pass-through into CPI: petrol, energy bills, core goods, and second-round effects. They say these channels raise inflation in the near term, which supports holding rates for now.

Uk Data And Policy Outlook

They report mixed UK data and a slowing labour market as earlier policy restraint weighs on growth. They also refer to the Bank of England’s forecasts showing inflation at or below target from mid-year onwards. Nomura still expects two further rate cuts, in April and July, taking the policy rate to a 3.25% terminal level. They add that higher energy prices and sticky services inflation could push back the timing of those cuts. Looking back at the analysis from 2025, the prediction that the Bank of England would hold rates due to oil price inflation proved correct. The Bank Rate has been held steady at 5.25% for seven consecutive meetings, as policymakers remained focused on bringing inflation down. We see that this cautious stance was justified as inflationary pressures, particularly from services, have been persistent. The concern last year was over $100 oil, but Brent crude has since stabilized, currently trading around $85 per barrel. However, UK inflation remains well above the 2% target, with the latest CPI data for February 2026 coming in at 3.4%, showing that underlying price pressures are taking time to ease. This stickiness challenges the idea that inflation would be at or below target by the middle of this year.

Market Pricing And Trading Implications

The view in 2025 anticipated rate cuts starting in April 2026, but the market has pushed this timeline back significantly. Current pricing from the SONIA futures market suggests the first full 25 basis point cut is not expected until August, with only a small chance of a move in June. This repricing reflects the reality that wage growth, while slowing, and services inflation are keeping the Bank of England on hold for longer. For derivative traders, this means the previous strategy of positioning for an imminent April cut is no longer viable. The focus should shift to trades that reflect a “higher for longer” scenario in the immediate term. This could involve using options on SONIA futures to bet against a rate cut at the May and June meetings. The UK job market has indeed softened as predicted, with the unemployment rate ticking up to 3.9% in the three months to January 2026. This slowdown supports the case for eventual rate cuts, but it is not weak enough to force the Bank’s hand while inflation is still a primary concern. The key tension is now timing, not direction. Therefore, derivative strategies should reflect this nuanced outlook by focusing on the timing of the first cut. Calendar spreads in interest rate futures could be effective, positioning for longer-dated contracts to outperform near-term ones as the market slowly prices in eventual easing later in the year. We believe the path to a 3.25% terminal rate is still plausible, but the journey will be slower than was anticipated back in 2025. Create your live VT Markets account and start trading now.

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