Bank of England Likely to Hold Rate, But Paves Way for September Hike
The Bank of England is expected to leave interest rates unchanged on June 18, but the regulator's signals will be hawkish. TD Economics analysts believe that due to high services inflation and sustained wage growth, the UK central bank will start raising rates as early as September if the energy shock continues to pressure prices.
'Active' Inaction: Why the Bank of England Says 'No' to the Market, But Prepares a Shock for Autumn
Author: Independent Financial Analyst
Markets have already priced in that the Bank of England will leave rates at 3.75% on June 18 — none of the 65 economists polled by Reuters expect otherwise. But the real drama lies behind this unanimous consensus. The MPC is split, and not just 'hawks vs. doves,' but a fundamental divergence in assessing whether we are dealing with a temporary energy shock or a structural shift in inflation expectations.
I'll break down why Andrew Bailey calls holding the rate an 'active' decision, what the shift in tone really hides, and provide insight into the public sector that could be the trigger for a September hike.
[The Core]: What's Really Happening
The Bank of England is frozen in indecision, but its 'active inaction' is already policy. Bailey has directly stated that the central bank has 'substantially tightened policy' simply by removing expected rate cuts from the table. Before the Iran conflict, traders were pricing in two 25bp cuts in 2026. Now they are pricing in a hike instead. This change in expectations has tightened financial conditions more than any actual rate hike.
This is the key point the news misses. Bailey uses the term 'active hold.' This means the MPC views the status quo not as passive waiting, but as a conscious choice for tightening because the alternative would be easing. In other words, 'doing nothing' in current conditions is 'doing a lot' compared to what would have been without the war.
The numbers confirm this. The yield on 10-year UK gilts has jumped to highs not seen since 2008, and 2-year yields have risen 40-50 basis points since the start of the conflict. Mortgage rates have risen without waiting for the MPC decision. Bailey is essentially telling the market: 'We're not touching the rate, but you've already done our job for us.'
Timeline and Context
The situation has developed rapidly. As recently as late April, markets expected three rate hikes in 2026. Then Bailey gave a 'dovish' signal in Reykjavik, and expectations collapsed to just one hike. Now, after May CPI data (2.8%, better than the 3.0% forecast) and CFO surveys, some in the market doubt whether hikes are needed at all.
| Date | Event | Key Signal |
|---|---|---|
| April 2026 | Energy price spike due to war | Market prices in 3 rate hikes by year-end |
| May 29, 2026 | Bailey speaks in Reykjavik | 'Dovish' signal: central bank may tolerate temporary inflation overshoot for the economy |
| Early June 2026 | Greene and Pill express need for hike | Hawkish tilt within MPC |
| June 12, 2026 | Reuters poll: all 65 economists expect rate hold on June 18 | Unanimous consensus on action, split on rhetoric |
| June 17, 2026 | May CPI data released (forecast 3.0%) | Final touch before the meeting |
In this kaleidoscope of opinions, there are two stable cores. First is Megan Greene, who recently stated that 'the case for a rate hike is getting stronger' as the conflict drags on. Second is Huw Pill, who already voted for a 25bp hike in April. It is expected that on June 18, Greene will join Pill, but the remaining eight MPC members will maintain the status quo.
Who Wins and Who Loses
Winners:
Holders of short-term UK gilts. Yields on 2-year notes have risen in line with rate hike expectations. Investors who moved to the short end of the curve are locking in profits and earning yields of 4.0-4.2%.
Banks with high net interest margins. Barclays, Lloyds, NatWest — their margins widen as rates rise, even if the rate formally doesn't change, but only expectations rise. Mortgages and loans are tied to swap rates, which have already increased.
Hedge funds playing on GBP volatility. Disagreements within the MPC and uncertainty over the energy shock create ideal conditions for option strategies. GBP/USD volatility has risen to 8-9% since early June.
Losers:
Borrowers with floating-rate mortgages. Even without a BoE rate hike, swap rates have soared, and banks have already started raising rates on new mortgages. A typical two-year fixed rate has risen from 4.5% to 5.2% over the past six weeks.
Retail chains and consumer companies. Higher rate expectations mean a stronger pound (GBP has risen 1.5% against a basket of currencies since early June), which cheapens imports but signals economic weakness. The UK services PMI fell to 51.2 in May — the lowest since November 2024.
Keir Starmer's government. High gilt yields increase the cost of debt servicing. Each 1pp rise in average yield adds £20-25 billion to annual interest expenses. This means less money for promised social programs.
What the Media Isn't Saying
Insight that didn't make the headlines on rate expectations:
The Bank of England is most worried about the gap between public and private sector wages. Bailey personally acknowledged that this 'opens a wedge' in traditional models.
Since early 2025, public sector wages have been growing at 4.8% year-on-year, while private sector wages have grown only 3.0%. This is the largest gap since 2021. Historically, the BoE focused on the private sector — it is more sensitive to the economic cycle and directly affects prices set by businesses. But when the public sector, which accounts for about 17% of total UK employment, aggressively raises wages, it creates two risks.
The first is direct: taxpayers (read: consumers) get more money, part of which goes to consumption. The second is indirect and more dangerous: the private sector starts losing the competition for talent and is forced to raise wages to retain employees. This is a classic spiral effect that could push inflation higher, even if energy prices stabilize.
The market completely misses this factor. Everyone talks about the energy shock, Hormuz, the Middle East. But when Q3 wage data comes out in September, and if the gap persists, Bailey, who now looks like a 'dove,' may be forced to act. That's why I estimate the probability of a September hike not at 40%, but at 55-60%.
Forecast: Next 30 Days and 90 Days
Next 30 days (to mid-July 2026):
On June 18, the rate will remain 3.75%, but the votes from Greene and Pill for a hike will be reflected in the minutes. The market will take this as a signal: 'hawks are gaining weight.'
The key date is the release of the meeting minutes (two weeks after the meeting). If they contain a phrase like 'some members believe tightening may be needed sooner than expected,' the pound will strengthen by 0.5-1.0%, and 2-year gilt yields will jump 10-15bp.
The main driver in the next 30 days is not the rate, but oil. If Brent remains above $90, inflation expectations will continue to rise, and a September hike will become the base case.
Next 90 days (to mid-September 2026):
The September meeting (the first after the summer break) will be key. By then, the BoE will have inflation data for June and July, as well as fresh wage estimates.
My base case (60% probability) is a rate hike to 4.0% in September. Reasons:
- Services inflation (currently around 4.3%) will remain stubbornly high. Bailey has already said the energy shock is starting to 'spill over' into services through transport and utilities.
- The public-private sector wage gap will not narrow. On the contrary, teacher and doctor unions are already demanding new increases.
- The BoE will want to act before the wage-price spiral accelerates, not after.
Alternative scenario (30% probability): rates stay at 3.75% until 2027 if oil falls to $70-75 due to peace in the Middle East. But even then, 'active hold' will remain: Bailey won't let the market relax.
What this means for assets:
- GBP/USD: range 1.25-1.31 over the next three months. A September hike would support the pound at the top of the range.
- FTSE 100: weak negative correlation. Fundamentally, high rates are bad for the index, as about 70% of FTSE 100 company profits are earned abroad and converted to pounds. A strong pound = lower reported profits.
- Long gilts (10-year): yields could rise to 4.6-4.8% by September if the market prices in a rate hike. The decline in long bond prices will continue.
Editorial Forecast
Asset: GBP/USD Direction: moderate rise in the next 24-72 hours (before the June 18 meeting) on expectations of a 'hawkish hold' Key levels: current ~1.2780; resistance 1.2850 (May high), support 1.2700 (50-day moving average). On hawkish signals, a breakout to 1.2900 is possible Confidence level: medium Main risk: if Bailey at the June 18 press conference gives an unexpectedly 'dovish' signal (e.g., 'we see no grounds for a hike in the foreseeable future'), the pound could fall to 1.2650-1.2680 within hours. I estimate the probability of this scenario at 15-20%, as Bailey has consistently adhered to the 'active hold' rhetoric since late May.
The editorial opinion is not an investment recommendation. All decisions to buy or sell assets are your own.
— Editorial Team
