[MARKET ANALYSIS] BoE Review: 2026 tightening increasingly likely, questions remain over the timing and magnitude

The BoE was broadly in-line with consensus. A 8-1 split, which can be argued as dovish/hawkish or in-line depending on which of the wide spread of expectations looked at. The announcement sparked a modest dovish reaction, seemingly on an unwinding of expectations for a more hawkish split post-Fed, and as the scenario analysis is, in Scenario A, indicative of a hold for a modest period of time. Furthermore, the language from most policymakers outlined that a hold is the most appropriate course of action at this time, while they wait for information on the size and duration of the shock, alongside the potential second-round effects. Pertinently, and lending a hawkish skew to things, Governor Bailey's statement notes that he currently places weight on Scenario B, but with slightly reduced second-round effects, and some weight on Scenario C, which would require a stronger monetary policy response. As it stands though, the softer economic environment merited the hold; additionally, he also acknowledged that wage pressures continue to gradually ease.
From the press conference, Bailey said they cannot wait to fully see the second round effects, but the BoE faces a difficult balancing act or judgement call between addressing price pressures and not hitting an already weak economy. April's decision to hold was taken as the weakness seen in activity is likely to reduce any second round effects, and as they remain uncertain about the size of such effects. From the scenarios, B is the one favoured by Bailey, while not all scenarios would necessarily require tightening; seemingly in relation to scenario A. Bailey added that they do have a "good deal" of policy space available to accommodate inflation pressures by not cutting rates.
Overall, the skew from the BoE is one to tightening in 2026. However, the timing and magnitude of any action remains unclear given the significant levels of uncertainty and lack of clarity on second round effects. As such, a move in June is plausible, but the skew is perhaps towards July and the next MPR at this point.
Pantheon looks for two or possibly three hikes in 2026 (prev. exp. one hike), dependent on energy prices. ING wrote that they are not edging towards a June hike (prev. no 2026 move), but they are "less convinced right now" than markets are about any further tightening.