City economists say markets overstate likely Bank of England rate rises
City economists say financial markets may be overestimating how far the Bank of England will raise interest rates, as higher energy costs have not yet driven a sharp rise in other prices. Some economists expect the Bank could start cutting rates again by the end of 2027, although further increases remain possible.
Markets imply at least four rises from today’s 3.75% bank rate to 4.75% by next July, and possibly 5% by December 2027. Deutsche Bank estimates only about 0.5 percentage points of rises are priced in after adjusting for risk premia, and expects rates to reach 4.25% by February before holding steady. The Bank is widely expected to raise rates to 4% on 5 November, following September inflation of 3.5%; higher-than-expected increases to the national living wage could add pressure for further rises.
In short
- Markets expect rates to rise to at least 4.75% by next summer.
- City economists think that path is unlikely.
- The Bank is widely expected to raise rates to 4% in November.
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The case for
If energy costs keep feeding through into broader prices, and wage increases add to inflationary pressure, the Bank may need to raise rates further to prevent inflation expectations from becoming entrenched. Market pricing could therefore reflect a reasonable precaution against persistent inflation and the risk that delaying action would require sharper increases later.
The case against
Energy prices have risen without yet causing a sharp increase in other prices, suggesting the inflation effect may be limited or temporary. If underlying price pressures ease, markets may be overstating the need for repeated rate rises; holding rates steady, or eventually cutting them, could avoid unnecessarily weighing on households and economic activity.
Explained simply
The Bank of England sets the UK’s bank rate, which influences borrowing costs for households and businesses and the interest paid on savings. It changes the rate to help keep inflation—the pace at which prices rise—under control.
Financial markets form expectations about future rates, which affect mortgage and other borrowing costs even before the Bank acts. Economists at banks and other City firms assess those expectations using factors including energy prices and whether higher costs are spreading to prices and wages more broadly.
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Originally published by The Guardian as “Interest rates unlikely to reach 4.75% by next summer, say City economists”.