JP Morgan cuts BoE rate hike view after Bailey flags market risks

JP Morgan has scaled back its expectations for Bank of England rate hikes this year, citing recent comments from Governor Andrew Bailey that suggested financial markets may be overestimating the need for tighter monetary policy.

The US bank now expects just one rate increase in 2026, compared with its earlier forecast of two hikes in April and July.

The revised outlook comes as policymakers weigh the economic fallout from rising energy prices and broader uncertainty linked to the Iran conflict.

Markets seen as overpricing rate hikes

Bailey signaled caution in a Reuters interview, pushing back against market expectations for multiple rate increases.

Financial markets are currently pricing in two hikes this year, having previously anticipated as many as four.

"(The market)'s still pricing us to raise rates. I would still say that is a judgment markets have to make but I think they're getting ahead of themselves," Bailey said.

Reflecting this shift in tone, JP Morgan now expects a single rate hike in June. "Bailey's comments suggest April is too soon for a majority for a hike to develop, and we now shift to expecting one hike in June," said Allan Monks, the bank’s chief UK economist.

Despite the adjustment, Monks added that the bank still expects two rate cuts in 2027.

Growth risks and inflation complicate policy path

The Bank of England faces a complex policy backdrop, as the Iran war has driven a sharp increase in global energy prices.

While higher energy costs are fueling inflation, they are also weighing on economic growth.

Bailey emphasized the need for a balanced approach, noting that policymakers must consider risks to jobs and economic activity alongside inflation pressures.

"We will have to, obviously, act on monetary policy if we think it's appropriate to do so. But it strikes me, and it still strikes me today, that the most important thing to do is to tackle the source of the shock," he said.

"Of course, we have to deal with the shocks that come our way. But our remit is very clear on this that ... we have to do so in a way that ... causes the least damage in terms of activity in the economy and in terms of jobs," he added.

The central bank has warned that financial markets remain vulnerable, particularly in areas such as private credit and bond markets, where leverage levels are elevated.

Weak demand limits pricing power

Economic conditions in the UK remain fragile, with Bailey pointing to signs of weakening demand and a softening labour market.

Inflation is projected to rise to 3.5% in the third quarter of 2026, above the Bank of England’s 2% target, but still well below previous peaks.

Despite the inflationary pressures, businesses appear constrained in their ability to pass on higher costs.

"Businesses consistently say to me that they're operating in a context of an absence of pricing power," Bailey said.

He acknowledged that some pass-through of higher energy costs is likely but stressed that the broader environment is marked by economic weakness.

"The context at the moment is of a softening labour market. We think activity is a bit below potential - so a bit of an output gap is opening up," he said.

The Bank of England is set to announce its next interest rate decision on April 30, with investors closely watching for further guidance as policymakers navigate a challenging economic landscape shaped by geopolitical risks and uneven growth.