Markets Push Bank of England Rate Hike Expectations into 2027

LONDON: Financial markets have pushed expectations for the next Bank of England (BoE) interest rate increase into 2027, reflecting growing uncertainty over the UK’s inflation outlook and the strength of the economy.

Market data compiled by LSEG showed that investors were pricing in around 24.3 basis points of monetary tightening by December, compared with about 36 basis points by February 2027. Only around four basis points of tightening were priced into the BoE’s September meeting, implying a probability of roughly 15% for a rate increase next month.

The shift marks a notable change from earlier expectations, when investors had anticipated that persistent inflation pressures could prompt the central bank to raise its benchmark rate before the end of this year. The Bank Rate currently stands at 3.75%.

The change in market expectations came as British government bond yields declined. The yield on 10-year UK government bonds fell to around 5.01%, close to a two-week low, as investors reassessed the outlook for monetary policy.

Recent UK economic data have presented a mixed picture for policymakers. Inflation rose to 2.9% in July from 2.6% in June, partly reflecting higher energy costs, keeping price pressures above the BoE’s 2% target. At the same time, the labour market has shown signs of weakness, limiting the case for aggressive monetary tightening.

A Reuters poll of economists earlier this month found that a strong majority expected the BoE to leave interest rates unchanged at 3.75% for the remainder of 2026. Of 64 economists surveyed, 56 expected no change this year, while only six forecast a rate increase.

Investors are also monitoring developments in global financial markets, including the upcoming Jackson Hole economic symposium, where Federal Reserve Chair Kevin Warsh is expected to provide guidance on the future direction of U.S. monetary policy. His remarks could influence currency and bond markets worldwide, including sterling.

The latest market pricing suggests that investors are increasingly prepared to wait until early 2027 for the next BoE rate increase, although developments in inflation, energy prices, wages and economic growth could alter expectations in the coming months.