Pound Suffers as Oil Price Surge Fuels Doubts Over BoE Rate Hikes

Commerzbank's Michael Pfister believes that rising oil prices have significantly lifted expectations for Bank of England (BoE) interest rate hikes. He points out that markets now anticipate four BoE hikes by mid-2027, up from just over one in June.

This shift in expectations is due to the close link between oil prices and interest rate expectations in the current environment. As a result, policymakers at the BoE face a difficult decision on whether to raise interest rates in the face of a weak labour market and potential growth risks from upcoming budget talks.

Pfister emphasizes that while UK growth figures are robust, the labour market remains in a serious crisis. This raises questions about the realism of such significant rate hikes, leaving him sceptical as to whether markets have correctly priced in these expectations.