Bank of America Expects Two BoE Rate Hikes by February 2027
10h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
Bank of Englandinterest rates
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Analysts at Bank of America Global Research have revised their outlook for UK interest rates, now expecting the Bank of England to implement two additional 25-basis-point hikes this cycle. The updated forecast, published on 17 June 2026, calls for the first increase in November 2026 and a second in February 2027, pushing the Bank Rate to a terminal level of 6.0%. This marks a significant reversal from the investment bank's prior expectation for policy easing, with the pivot driven primarily by sustained pressures from volatile energy markets and entrenched services sector inflation.
The Bank of England's last comparable rate adjustment path occurred during the 2022-2023 hiking cycle, when the Monetary Policy Committee raised rates fourteen consecutive times, from 0.1% to a 15-year peak of 5.25%. That period was also defined by external energy shocks, most notably the European gas crisis following the Russia-Ukraine conflict. Today's macro backdrop features a Bank Rate held at 5.5% for ten consecutive meetings, with annual headline consumer price inflation still above the 2% target.
What changed to trigger this hawkish forecast revision is a combination of recent data points and forward-looking market indicators. UK natural gas prices have experienced renewed volatility due to supply disruptions and lower-than-expected storage injections, directly impacting consumer energy bills and business costs. Simultaneously, core services inflation, a key domestic metric watched by the MPC, has remained stubbornly elevated, averaging 5.7% year-on-year over the last three reported months.
The catalyst chain links these persistent inflationary pressures to wage-setting behavior and inflation expectations. Stronger-than-expected wage growth data for April, with regular pay excluding bonuses rising 6.0%, suggests domestic cost pressures are not yet fully contained. This creates a risk that higher energy costs will become embedded in broader price and wage dynamics, forcing the central bank to maintain a restrictive stance for longer.
Bank of America's revised forecast expects the Bank Rate to reach 6.0% by February 2027, a 50-basis-point increase from the current 5.5% level. UK front-month natural gas futures have surged approximately 35% since a recent trough in early May 2026. This spike follows a period of relative stability where prices traded between 80 and 90 pence per therm for the preceding eight months.
The UK 2-year government bond yield, a sensitive gauge of near-term rate expectations, traded at 4.68% following the forecast publication. This represents a 22-basis-point increase from its level one month prior. In comparison, the German 2-year Schatz yield stands at 3.12%, maintaining a wide spread of 156 basis points that reflects persistent UK inflation premium.
Money markets have significantly repriced future rate expectations in recent weeks. Market-implied pricing now shows less than a 10% probability of a BoE rate cut in 2026, down from a 65% probability priced just two months ago. The yield on the 10-year UK gilt is 4.41%, while the FTSE 100 equity index shows a year-to-date decline of 2.3%, underperforming the Euro Stoxx 50's gain of 4.1% over the same period.
The primary second-order effect of delayed and higher terminal rates is increased pressure on UK consumer discretionary stocks and highly leveraged real estate investment trusts. Companies like JD Sports Fashion (JD.L) and Marks & Spencer (MKS.L) face headwinds from reduced disposable income as mortgage costs remain elevated. UK homebuilders such as Barratt Developments (BDEV.L) and Taylor Wimpey (TW.L) are also sensitive to higher borrowing costs, which dampen housing demand.
Beneficiaries of this environment include UK retail banks like Lloyds Banking Group (LLOY.L) and NatWest Group (NWG.L), which can maintain wider net interest margins for a longer duration. The UK financial sector ETF (FNCL.L) has outperformed the broader FTSE 350 by 180 basis points over the last month as rate cut expectations evaporated. Insurance companies, including Legal & General Group (LGEN.L), also benefit from higher returns on their fixed-income portfolios.
A key limitation of this hawkish view is the potential for a sharper-than-expected economic slowdown. Recent PMI surveys indicate the UK services sector expanded at its slowest pace in six months during May. If consumer spending weakens materially, the BoE may prioritize growth concerns over inflation, pausing the hiking cycle. Current positioning data from CFTC reports shows asset managers have increased their short sterling positions against the US dollar, anticipating relative BoE hawkishness will provide limited support for the currency amid broader dollar strength.
The immediate catalyst is the Bank of England's Monetary Policy Committee decision and meeting minutes on 20 June 2026. Markets will scrutinize the vote split and any changes in forward guidance regarding the persistence of inflation. The next UK Consumer Price Index release, scheduled for 19 July 2026, will provide critical evidence on whether the May energy price spike is filtering into broader inflation.
Traders will monitor the UK 2-year gilt yield for a sustained break above the 4.75% level, which would signal markets are fully pricing in at least one additional hike. Support for sterling against the dollar (GBP/USD) is seen at the 1.2500 level, with resistance near 1.2800. The performance of the FTSE 350 Banks Index relative to the FTSE 350 Household Goods Index will serve as a barometer for sector rotation driven by rate expectations.
Bank of America's call for two more hikes is among the most hawkish on Wall Street. As of mid-June 2026, consensus among major sell-side firms is split. Goldman Sachs expects one final 25-basis-point hike in August 2026, followed by a prolonged hold. JPMorgan forecasts a hold at 5.5% throughout 2026, with cuts beginning in early 2027. Barclays aligns more closely with BofA, projecting a hike in November 2026 but views a second move in 2027 as data-dependent rather than a base case.
The volatility stems from a combination of factors. Unplanned maintenance outages at several key Norwegian gas export terminals have reduced pipeline flows to the UK. Simultaneously, European gas storage levels, while high overall, are refilling at a slower pace than the five-year average due to increased Asian demand for liquefied natural gas cargoes. Within the UK, lower wind power generation in recent weeks has increased reliance on gas-fired power plants, boosting domestic demand for the fuel at a time of tighter supply.
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