Rabobank's Senior FX Strategist Jane Foley has outlined the bank's baseline view that the Bank of England (BoE) will keep interest rates unchanged through 2026, citing several key economic indicators. Foley points to the softer-than-expected UK May Consumer Price Index (CPI) inflation data, which came in at 2.8% year-on-year for the headline rate, as well as a recent drop in oil prices and a slack UK labour market, as factors that should help contain inflation expectations [1].
Foley notes that while the market is currently pricing in around 20 basis points of tightening over the next six months, Rabobank expects no change in BoE rates for the remainder of the year. She emphasizes that the centrists within the Monetary Policy Committee (MPC) would only consider a rate hike if there were clear evidence of prolonged high energy prices leading to second-round inflation effects [1].
The report highlights a potential disconnect between market expectations and Rabobank's forecast, warning that further repricing of BoE rate hike expectations could put pressure on the Pound and support a moderate move higher in EUR/GBP over a one- to three-month view [1].
The article also clarifies that the headline was corrected to reflect Rabobank's expectation of no change in BoE rates in 2026, not 2024, as previously stated [1].
CONCLUSION
Rabobank anticipates that the Bank of England will maintain its current interest rate policy through 2026, despite market pricing for modest tightening. This divergence could weigh on the Pound and support EUR/GBP in the coming months, especially if market expectations are repriced.