Bank of America expects how the Bank of England will act amid soaring energy prices.

Investing.com - Bank of America has revised its forecast for the Bank of England, now expecting the central bank to keep interest rates at 3.75% in March rather than cutting rates, as rising energy prices have prompted policymakers to adopt a cautious stance.

Don’t miss out on rapidly changing market dynamics. InvestingPro provides you with real-time headlines, analyst notes, and instant data.

This shift stems from recent increases in energy prices, which have raised concerns about potential impacts on inflation and wage expectations. Bank of America analysts expect the voting results to be 7-2 in favor of holding rates steady, with a 6-3 split risk.

Taylor and Dhingra are expected to vote for a 25 basis point rate cut, while Ramsden may join them, although soaring energy prices could lead him to support holding rates unchanged.

The bank has delayed its expected rate cut timeline from previous forecasts of March and June to June and September. This forecast assumes that energy price fluctuations will reverse in the coming months.

Bank of America believes that if the energy price shock proves to be temporary and does not substantially raise inflation expectations, further rate cuts remain possible.

Several factors support the possibility of eventual rate cuts, including current restrictive interest rates, anti-inflation budget measures starting in April, slowing wage growth, downside risks to economic growth, and a labor market that is softer compared to the energy shock of 2022.

However, Bank of America acknowledges significant uncertainty around inflation and interest rate paths, depending on the scale and persistence of energy price fluctuations. If energy prices reverse quickly, an earlier rate cut in April remains possible, but ongoing conflicts could delay further cuts, reducing the number of rate cuts this year.

If energy prices continue to rise into the second quarter, doubts may arise about the Bank of England implementing two rate cuts this year, with a single cut becoming more likely.

If energy prices stay high into the second half of 2026, rate cuts this year could be entirely canceled, and in some cases, rate hikes might even occur, although the threshold for raising rates remains high.

In scenarios where energy price fluctuations reverse within a few months, Bank of America expects inflation in 2026 to be 15-20 basis points higher than current forecasts of 2.2%, and in 2027, about 10 basis points lower than the current 2.0%. The timing for inflation to return to 2% could be pushed from Q3 to Q4. Economic growth in 2026 might be about 10 basis points lower than the 1.2% forecast.

If higher energy prices persist until June, 2026 inflation could be roughly 40 basis points above expectations, with 2027 inflation about 25 basis points lower, and the increase in the second half of the year around 50 basis points. The timing for inflation to return to 2% could be delayed from Q3 2026 to 2027, and economic growth in 2026 might be 20-25 basis points lower.

Since the February meeting, data has shown a dovish trend: unemployment rose to 5.2%, inflation fell to 3.0%, and wage growth slowed to 3.4%. However, soaring energy prices have raised concerns that if the increase proves to be persistent and substantial, wage and inflation expectations could gradually rise.

Bank of America expects the Bank of England to maintain its accommodative stance in the March meeting minutes, while emphasizing increased uncertainty.

The central bank may retain its statement that the degree and timing of further easing will depend on the evolution of inflation prospects, while also stressing that the threshold for rate hikes remains high, requiring sustained high inflation and unanchored inflation expectations.

This article was translated with the assistance of artificial intelligence. For more information, please see our Terms of Use.