ING analysts project policy inertia as sticky wage growth forces a restrictive stance. Watch the GBP/USD spread as the primary driver for sterling traders.
ING analysts now project the Bank of England will keep the base rate on hold through the entirety of 2026. This outlook assumes the central bank remains committed to a restrictive stance, prioritizing the cooling of domestic services inflation over immediate growth stimuli.
Market participants had previously priced in a more aggressive easing cycle, but the current consensus shifting toward a prolonged pause suggests a recalibration of capital costs for the UK economy. If the BoE maintains this course, the spread between the UK and other major economies will become a primary driver for the GBP/USD profile in the coming quarters.
The central bank's reluctance to cut stems from sticky wage growth and the persistent nature of services inflation. Unlike the Fed, which has signaled a willingness to pivot as labor markets soften, the BoE faces a unique challenge in the form of labor shortages and structural wage demands that keep core pressures elevated.
Traders should anticipate a period of lower volatility in the front end of the Gilt curve if the market accepts this "higher for longer" narrative. However, this creates a divergence risk if the UK economy slips into a deeper recession than the BoE currently anticipates. Investors should monitor the forex market analysis for signs of a carry trade unwinding if the yield differential between the UK and the US begins to compress unexpectedly.
"The Bank of England is unlikely to be in a rush to cut rates further, with the current data set pointing toward a sustained plateau well into the next two years."
Expect the Bank of England to favor caution over speed, effectively locking the UK into a stagnant rate environment for the foreseeable future.
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