Two more BoE cuts in 2026? UBS flags risks to February move

Investing.com -- UBS forecasts the Bank of England will implement two additional 25-basis-point rate cuts in 2026, likely in February and April, bringing the terminal rate to 3.25%.

The Swiss bank warned of increasing risks of a delay to the February cut in its Thursday note, which followed the BoE’s decision to reduce its key interest rate by 25 basis points to 3.75%.

The Monetary Policy Committee was narrowly split in a 5-4 vote on this decision.

In its forward guidance, the central bank adopted a cautious tone, indicating that Bank Rate would likely follow a gradual downward path while warning that decisions on further policy easing are becoming "increasingly finely balanced."

Governor Andrew Bailey and Deputy Governors Breeden and Ramsden, despite supporting the cut, expressed concerns about strong forward-looking wage growth indicators as a potential inflation risk.

UBS will monitor upcoming economic data to assess the likelihood of additional rate cuts, with particular focus on the KPMG and REC UK report on jobs due January 9 and the labor market report scheduled for January 20. The bank will look for signs of easing wage growth in these reports.

For currency markets, UBS expects the British pound to "muddle through" with a target of EURGBP 0.8800 for 2026. The bank noted that sterling faces opposing forces - lower short-term rates eroding carry advantage as the BoE delivers further cuts, while lower long-term gilt yields signal reduced political, fiscal and inflation premium.

The BoE acknowledged that compared to its November assessment, "the risk from greater inflation persistence had become somewhat less pronounced." The central bank now expects inflation "closer to 2%" in Q2 2026, reflecting recent CPI data and measures announced in the Budget, particularly regarding energy.