A View from the Bridge - April 2026

 “Never forget where you’re coming from” is the chorus line to a Take That hit from 1995 and much of yesterday’s policy decision and press conference was metaphorically sung in that vein. The Bank delivered its first quarterly forecast since the onset of the Iran war, centred upon three scenarios for energy prices in order of severity to the growth and inflation outlook:
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Scenario A assumed no second-round effects due to weaker worker bargaining and firm pricing power.
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Scenario B saw modest second round effects with some impact on short-term inflation expectations whilst
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Scenario C saw stronger and more persistent second-round effects driving up wages and inflation expectations.
This resulted in two key policy judgements:
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Continued weakness in demand and the labour market is likely to lessen the strength of second-round effects from higher energy prices and
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Monetary policy needs to balance the costs of leaning too little against second-round effects and the cost of responding too much.
The BOE remains highly cognisant of the path travelled since early February when BOE forecasts were consistent with market pricing of up to three interest rate cuts during 2026. Since then, the implied change in the SONIA rate for the December 2026 meeting had moved from -60bp to +80bp at last night’s close. Not too dissimilar to the levels in place in the aftermath of the March 19th meeting when the committee were forced to abandon their easing bias sending 2-year rates 40bp higher on the day. In short, not much has changed from a market pricing or policy perspective over the past 6 weeks, rather the committee’s wait-and-see approach has been buttressed by a set of modelled forecasts and scenarios.
However, in context of the Bank bringing inflation sustainably back to its 2% target, we should be under little doubt that the policy path is implicitly tied to the duration of the negative supply shock from curtailed oil and gas shipments and associated by-products (such as fertiliser, CO2) from the Gulf. This is not just about the reopening of shipping routes but also the time it takes to return to normal supply levels given reported infrastructure damage. A subdued labour market, softening growth indicators and pre-emptive market tightening have and continue to buy the BOE more time to monitor pass through risks than was the case coming out of the pandemic and following Russia’s invasion of Ukraine. Governor Bailey alluded to having a much cleaner read on labour market conditions today as opposed to the furlough scheme masking supply conditions 5 years ago. It’s worth remembering that 2-year inflation swaps surged by 5% in 2021-22, this move has been a more modest 1.5%, so far.
The key is whether a tipping point is reached between Scenario A/B (moderate inflation) and Scenario C (high and persistent inflation); the former should allow for a prolonged “active hold” whilst the latter could portend the bank fulfilling market expectations of 2 to 3 hikes assuming the economy hasn’t already entered recession. Therefore, rates may decline a bit over the coming days given the immediate hold and 7 - 8 week gap to the next meeting. That said, we should expect the risk premium in market pricing to persist until there is a resolution to the blockade in the Strait of Hormuz or the Bank decides it has no choice but move closer to market pricing of 2-3 hikes by year-end.