The Bank of England held the Bank Rate at 3.75% and the decision was unanimous at 9–0. UOB now expects the GBP Repo Rate to stay at 3.75% through 4Q26, removing a prior forecast for three cuts in 2026. The BoE’s stance shifted from planning for easing to closer watch on inflation risks. It indicated that rate rises could be considered if inflation pressures persist.

Inflation Risks Back In Focus

In its Monetary Policy Summary and Minutes, the BoE said it is ready to act to keep CPI inflation on track for the 2% target in the medium term. It also noted that disinflation had been continuing before the conflict, but a new shock is expected to push inflation higher in the near term. The BoE warned that second-round effects, from wages and price-setting, become more likely the longer energy prices stay high. The Minutes added that a larger or longer shock could require a more restrictive policy stance, while a short-lived shock or more economic slack could lead to less restrictive policy. The Bank of England’s decision to hold rates at 3.75% and signal potential hikes is a major shift from what we previously expected. Markets had been pricing in at least two rate cuts for 2026, but that outlook is now completely off the table. This change is reinforced by the latest Consumer Prices Index (CPI) report from February, which showed inflation remaining sticky at 2.8%, keeping pressure on the central bank. This hawkishness is a direct response to recent external shocks, particularly renewed tensions in the Strait of Hormuz which have caused a spike in global energy prices. Brent crude has climbed over 15% in the last month to trade above $90 a barrel, feeding fears of imported inflation. The Bank is clearly signaling it will prioritise fighting this over supporting an economy that saw just 0.1% growth in the last quarter of 2025.

Market Pricing Shifts Rapidly

For derivative traders, this means immediately unwinding positions that bet on lower rates in the short to medium term. We are seeing a significant sell-off in short-sterling futures, and the UK 2-year gilt yield has already jumped 25 basis points to reflect the new reality. The overnight index swap market now indicates virtually no chance of a rate cut before 2027. This policy stance is fundamentally supportive for the Pound, as higher potential yields attract international capital. Options strategies should now favour GBP strength, especially against currencies with more dovish central banks like the Euro or the Swiss Franc. Implied volatility in GBP/USD has risen to a three-month high, suggesting traders are preparing for larger price swings ahead. We saw a similar rapid repricing of interest rate expectations back in 2022 when central banks began their aggressive fight against post-pandemic inflation. The key factor now, as it was then, will be the persistence of the shock and its impact on wage growth. All eyes will be on the next labour market report to see if these higher energy costs are creating the second-round effects the Bank fears most. Create your live VT Markets account and start trading now.

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