Bank of England Holds Rates Steady as Analysts Detect Hawkish Signals; Rate Hike Risks Emerge

Investing.com - The Bank of England kept interest rates unchanged at 3.75% during the March meeting, but analysts said the decision sent an unexpectedly hawkish signal, changing market expectations and increasing the likelihood of rate hikes rather than cuts in the coming months.

The Monetary Policy Committee unanimously voted to hold rates steady to assess the impact of the Middle East conflict and rising energy prices on the economy. While keeping rates unchanged was broadly expected, the hawkish tone caught many analysts off guard and led to a significant re-pricing in the UK interest rate market.

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U.S. Bank Securities highlighted the hawkish nature of this decision, noting that the 9-0 unanimous vote surprised the market, which had previously expected two members to support a rate cut. The firm pointed out that the Bank of England has moved away from easing bias and is open to possible rate hikes, especially if energy shocks are larger or more prolonged.

U.S. Bank now believes its previous forecast of further easing this year carries risks, though it still sees a high threshold for actual rate increases given the weak economic conditions. The firm suggests that after prolonging the current rate or making small hikes, a larger cut could occur in 2027.

UBS’s Chief Investment Office described this meeting as a “hawkish hold” and revised its forecast accordingly. The bank now expects the Bank of England to keep rates at 3.75% most of this year, with the next rate cut delayed until November and a second cut postponed to February 2027.

UBS noted that even members of the dovish camp on the Monetary Policy Committee acknowledged the possibility of rate hikes. However, the firm believes that actual increases seem unlikely, as larger energy shocks would severely impact economic activity.

ING Markets emphasized the hawkish surprise, pointing out that despite market expectations of two members supporting a rate cut, the vote was 9-0. The bank highlighted that the most dovish members of the MPC openly discussed the possibility of rate hikes.

ING believes the market’s pricing of a 70 basis point increase before the end of the year is overly aggressive, given fewer favorable secondary effects compared to 2022. The re-pricing has kept the euro-sterling exchange rate relatively stable, with oil prices remaining a key driver.

Goldman Sachs sees this communication as indicating a “significantly more hawkish reaction function” than expected. The firm noted that the committee hinted it might have enough information at the April meeting to decide on a rate hike.

Goldman Sachs revised its forecast, now expecting the Bank of England to hold rates steady throughout 2026, whereas previously it anticipated rate cuts starting from July each quarter. The firm still expects gradual policy normalization in 2027 but admits that ongoing energy shocks pose a significant near-term risk of rate hikes.

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