Bank of England likely to maintain rate at June meeting

Bank of America anticipates the Bank of England will hold rates at its June meeting but proceed with three 25 basis point rate cuts in August, September, and November, contingent on inflation trends. Meeting minutes are expected to reflect continued progress on underlying inflation, minimizing the likelihood of pausing the quarterly cutting cycle. Despite recent seasonal pound underperformance, Bank of America maintains a constructive view on UK rates, particularly 30-year Gilts, citing the UK Debt Management Office’s proactive approach and an improved international investment position.

Analysis

Bank of America (BoA) anticipates the Bank of England (BoE) will maintain interest rates at its June meeting, with a likely 7-2 vote, while signaling a careful and gradual approach to future monetary easing. BoA projects three subsequent 25 basis point cuts to the Bank Rate in August, September, and November, although concerns over elevated domestic inflation could jeopardize the September reduction. The minutes from the upcoming BoE meeting are expected to affirm continued progress in taming underlying inflation, reducing the probability of a pause in the quarterly rate-cutting cycle, contingent on May's inflation data not presenting significant upside surprises; while April's inflation showed strength, this is anticipated to reverse in May. BoA forecasts UK inflation at 3.0% for 2025 and 2.2% for 2026, with a quarterly peak of 3.3% projected for Q2 and Q3 2025. UK economic growth prospects are seen with BoA projecting 1.1% growth in 2025 and 1.3% in 2026, figures below pre-"Liberation Day" estimates that assumed 10% tariffs, though the UK/US trade deal is expected to mitigate severe downside risks. In currency markets, recent pound sterling underperformance has been attributed to seasonal trends and softer macroeconomic data; however, BoA's internal dashboard does not suggest increasing bearish sentiment towards GBP, though investor positioning is a concern approaching a July 9 tariff deadline. BoA maintains a constructive stance on UK rates, particularly favoring 30-year Gilts, citing the UK Debt Management Office's proactive management, expectations for a slowdown in quantitative tightening, and an improved UK international investment position. Investor surveys from June 6-11 indicate neutral positioning on pound sterling and modestly bullish sentiment for UK duration, with a preference for UK over US duration.

Key Decisions for Investors

• Investors should consider potential opportunities in UK fixed income, particularly longer-duration assets like 30-year Gilts, in light of the anticipated Bank of England rate cutting cycle commencing in August.
• Closely monitor upcoming UK inflation data, especially the May figures, as any significant upside surprises could alter the Bank of England's projected easing path and potentially put the September rate cut at risk.
• Maintain a cautious stance on pound sterling, being mindful of recent underperformance, seasonal factors, and positioning concerns ahead of the July 9 tariff deadline, even as broader market sentiment towards the currency has not turned overtly bearish.