OECD Downgrade Warns of Sterling Risks in 2027

The pound sterling remains supported into year-end despite the OECD's warning of downside risks in 2027. The Organisation for Economic Co-operation and Development (OECD) raised its UK growth forecast for 2026 to 1.1% from 0.9%, largely based on data already published, including the second-quarter demand that held up despite higher fuel prices.

The forward-looking half of the report went in the opposite direction, with 2027 trimmed to 1.0% from 1.1% due to the drag from higher interest rates over the coming year. Global growth was revised to 2.9% for this year and down to 3.0% for next.

Sterling's reaction suggests that the market had already priced in the 2026 number, with the pound-to-dollar rate at 1.3317 on Wednesday after touching 1.3316, its lowest since August 21. The pound-to-euro rate is at 1.1649, holding above the 1.1615 low struck after the Bank of England's September 17 hold.

The OECD paired its upgrade with the judgement that UK policy is already tight enough, which weighed on the pound. This assessment was echoed by Kathleen Brooks, Research Director at XTB, who noted that the OECD expects Bank Rate to stay at 3.75% well into next year, leaving the Bank free to sit out the tightening its peers are delivering.

However, Money markets price close to 90% odds of a November hike after three Monetary Policy Committee members voted for an immediate rise last week. Our House View is that the pound stays capped into the October 28 Budget and recovers afterwards, with the UK's 2026 outperformance carrying sterling to a higher year-end.

But the OECD's 2027 cut is a new pointer to the challenge that 2027 presents. In view of mounting headwinds, Deutsche Bank turned bearish on sterling on September 22, switching from the long stance it had held for much of 2026. The bank expects sterling to underperform other major currencies and favour selling against a basket of EUR, USD, CHF, and JPY.