Interest rate futures markets are strongly betting on a November rate hike from the Bank of England (BoE).
The BoE will announce its interest rate decision, meeting minutes, and latest economic forecasts on Thursday, followed by a press conference from Governor Bailey. A Reuters poll of most economists, however, expects the Monetary Policy Committee (MPC) to vote 7-2 to keep rates on hold and unchanged for the rest of the year.
This comes after UK CPI fell to a 15-month low in June, and private-sector wage growth hit its weakest level since 2020. The new government, led by Prime Minister Andy Burnham, has made tackling the cost-of-living crisis a top priority, announcing the removal of VAT on household electricity bills.
UBS economist Anna Titareva calculated that this move will exert about 0.1 percentage points of downward pressure on inflation. Titareva is clearly betting on a rate cut: "The next policy move will be a rate cut, in February and April 2027."
Fundamentally, there is almost no logic supporting a BoE rate hike. Yet, Wednesday's interest rate futures data pointed to a 25-basis-point rate hike by the BoE in November, followed by another increase in March 2027.
This meeting coincides with the Federal Reserve's July decision, which shook markets with three dissenting votes favoring a rate hike. Chair Warsh expressed a "zero tolerance" stance on inflation, and the global hawkish cloud is narrowing the BoE's policy window.
Weakening CPI and Wages, Increased Fiscal Relief
Both domestic UK prices and labor costs are declining, providing core support for the BoE to hold steady. In June, CPI fell to 2.6%, a 15-month low. As a sticky indicator closely watched by the central bank, private-sector wage growth slowed to 2.9%, the lowest since 2020, indicating that the risk of an overheating labor market continues to recede.
Fiscal coordination has further expanded the policy space. Removing VAT on household electricity bills is a key cost-of-living measure championed by the Burnham government since taking office. On this basis, the BoE has already lowered its peak inflation forecast for this year from 3.6%-3.7% in April to just above 3.25% in two of its three scenarios regarding energy prices and inflation persistence.
However, UK inflation has exceeded the central bank's 2% target for most of the past five years. The MPC is closely watching whether the 2027 pay negotiations, set to begin later this year, will rekindle wage demands. Most committee members currently judge that, given the weakening labor market, the current interest rate level is sufficient to drive inflation down gradually.
Economist Consensus Clashes with Futures Pricing
A Reuters poll shows that most economists expect the MPC to vote 7-2 to keep the benchmark rate at 3.75%, with no adjustment for the rest of the year. However, interest rate futures markets paint a starkly different picture. They not only completely rule out a rate cut this year but also price in a 25-basis-point hike in November, with probability for another increase in March 2027.
The core logic driving this bet comes from energy prices. While the Strait of Hormuz has been closed for five months, current oil futures remain at the low end of the BoE's scenario assumptions. However, last week's impulsive surge above $100 per barrel triggered market vigilance over a potential inflation rebound.
Divisions within the MPC are also deepening. Chief Economist Huw Pill and external member Megan Greene are expected to continue voting for a rate hike. Deputy Governor Clare Lombardelli and external member Catherine Mann are seen as the most likely to join them. Mann warned this month that falling market borrowing costs could make controlling inflation more difficult.
Matthew Ryan, Head of Market Strategy at financial services firm Ebury, noted: "Current oil prices and recent economic data do not support the BoE hastily raising rates or issuing overly hawkish communication signals." Most MPC members believe that the overall tightening of financial conditions since the Middle East conflict has, in effect, already performed some of the tightening function.
Oil Price Variable and Fed Hawkish Spillover
As noted by sources, the Fed's July meeting left rates unchanged, but three FOMC members favored a 25-basis-point hike. This internal division adds new uncertainty to the global monetary policy path. Governor Bailey previously stated that the BoE's signal in March to pause rate cuts was "expected" to control inflation, and the tentative tone of this statement actually leaves room for policy flexibility.
On the BoE's own operational front, the pace of quantitative tightening has been slowed from £100 billion annually to £70 billion since 2025. Financial market participants expect the MPC may further reduce the pace of balance sheet runoff to £50 billion in September. The foundation of UK inflation is more fragile than that of the Eurozone. Energy prices have a higher pass-through weight in the CPI basket, and wage stickiness in the labor market has not yet cleared.
In this context, even if Thursday's decision is likely to hold rates steady, the market's rate hike pricing itself constitutes a form of implicit tightening. Governor Bailey's wording at the press conference will be a key signal for testing the central bank's attitude towards current market pricing.
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