HSBC analysts Willem Sels and Lucia Ku report that UK inflation remains above the Bank of England's (BoE) target, with the Consumer Price Index (CPI) moderating to 2.8% in May, but still not reaching the target level [1]. The BoE maintained its policy rate at 3.75% in June, as expected, reflecting ongoing concerns about wage pressures and weak consumer confidence, while economic growth is projected to stay modest amid mixed indicators [1].
Following the US-Iran interim peace agreement, energy prices have stabilized, leading HSBC to view inflation risks as more balanced [1]. As a result, HSBC has revised its rate forecast, now expecting no further rate hikes in 2026 and anticipating that the BoE will hold rates steady throughout this year [1]. Inflation is projected to peak at 3.25% in the fourth quarter, as second-round effects from the Middle East conflict are contained [1].
In terms of market positioning, HSBC maintains a neutral stance on UK gilts and UK equities, remains overweight on GBP investment grade credit—particularly in the 5–7-year duration segment—and has upgraded GBP high yield to neutral, citing improved risk sentiment despite ongoing political uncertainty [1].
CONCLUSION
HSBC's analysis suggests a more balanced inflation outlook for the UK, with no further BoE rate hikes expected in 2026 and rates likely to remain steady this year. The bank's neutral stance on UK gilts and equities, alongside a preference for investment grade credit, reflects cautious optimism amid persistent political and economic uncertainties.