Bank of England Rate Hike Expectations Slip into 2027

Investors' expectations for a Bank of England rate hike have shifted into next year, according to market prices. The data shows that investors do not fully price in a quarter-point rate hike until the February 2027 meeting. Currently, only 24.3 basis points of rate increases are priced in by the time of the BoE's December 17 rate announcement.

This is down from more than 25 basis points for most of August and 36 basis points of increase by the time of the February 4 rate announcement. Market prices imply a low chance of a hike at the September 17 meeting, with less than 4 basis points of tightening priced in. In contrast, the European Central Bank's decision on September 10 is expected to see 24 bps of tightening.

The British 10-year government bond yields were down by 2 basis points on Thursday at 5.01%, not far from a two-week low of 4.979% struck on Wednesday. The divergence between market expectations and economists' predictions reflects the uncertainty surrounding future rate decisions, according to Governor Andrew Bailey.

The labour market remains muted, but inflation rose to 2.9% in July due to higher household energy bills. Investors are closely watching the message Federal Reserve Chair Kevin Warsh will deliver at an annual gathering of central bankers on Friday in Jackson Hole, Wyoming.