Markets Pull Back Rate Hike Expectations to February 2027

Markets have adjusted their expectations for a Bank of England (BoE) rate hike, pushing it back to February 2027. According to Reuters, investors are no longer fully pricing in a quarter-point interest rate hike by the BoE until this date. The data from LSEG shows that markets were previously pricing in more than 25 basis points of tightening for most of August, but have since declined to 24.3 basis points by the December 17 policy decision.

Expectations have increased to around 36 basis points of tightening by the February 4, 2027 meeting. This is a significant decrease from the previous expectations, which suggests that markets are becoming more cautious about a rate hike. The British government bond yields continued to ease on Thursday, with the 10-year gilt yield down about 2 basis points at 5.01%.

The outlook for British monetary policy remains complicated by persistent inflation pressures and signs of weakness in the labour market. Official data released last week showed consumer inflation accelerating to 2.9% in July, driven in part by higher household energy bills. Bank of England Governor Andrew Bailey has previously indicated that the difference between economists' forecasts and market pricing partly reflected expectations of risks linked to a possible intensification of the U.S.-Iran conflict.

Investors are also turning their attention to the annual gathering of central bankers in Jackson Hole, Wyoming. Federal Reserve Chair Kevin Warsh is due to speak on Friday, with markets looking for clues about the U.S. central bank's policy outlook and the broader direction of global interest rates.