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Bank Rate forecasts will keep converging on market pricing while inflation forecasts climb and the labour market stabilises.
Bank Rate forecasts are moving up across the research houses, with Danske Bank and Nomura both adding November hikes this week and Pantheon Macroeconomics close to adding a third.
"We are adjusting our BoE forecast to include a rate hike in November, as inflation concerns have risen and growth has strengthened. Activity has proven more resilient than expected in recent months and the labour market is showing signs of stabilisation. We believe the BoE will act to contain inflation risks and prioritise the credibility of its inflation target," says Danske Bank.
"A combination of sticky inflation, a resilient labour market, strong economic growth and persistently elevated energy prices has led us to change our view on the BoE. We now see rate hikes in November and February, which is still a more dovish outcome than markets are pricing," says Nomura.
"We expect another hike in February and are very close to adding a third in May, or earlier," says Rob Wood, Chief UK Economist at Pantheon Macroeconomics.
Wood lifted his forecast inflation peak to 4.8% in February from 4.6% on higher wholesale energy prices, and holds inflation above 4.0% until July.
Market Pricing Sits at Four Hikes to 4.75%
"Markets also go considerably further than pricing a November move, with four rate hikes (100bp) in total priced in over the coming year, which would take Bank Rate to 4.75%," says Lloyds Bank.
Societe Generale calls the November increase locked in, with money markets priced for another three by next summer unless inflation progress stalls and the economy carries its resilience into 2027.
"A 25bps BOE policy rate hike to 4.00% on November 5 is pretty much a done deal," says Brown Brothers Harriman.
September's Inflation and Jobs Data Drove the Revisions
CPI inflation accelerated to 3.5% in September from 3.1% in August, above the 3.4% consensus, with services inflation at 3.7% and core at 2.8%, according to the Office for National Statistics.
Underlying services inflation reached 3.9% year-over-year, its highest since March, and three-month-on-three-month growth jumped to 4.4% from 3.4% in August.
"Rate-setters need to look beyond energy prices when headline inflation is set to peak at 4.8% next February and remain above 4% until July, well above the 3.5-to-4.0% threshold at which second-round effects become more likely," says Wood.
Unemployment fell to 4.7% against a 5.0% consensus the day before the inflation print, with regular pay growth at 3.7%, removing the slack the dovish majority relied on in September.
"The case for insurance hikes, as we've argued, is gaining momentum, particularly with the inflation normalisation process likely to be delayed further by ongoing tensions in the Middle East. We continue to think the BoE will lift Bank Rate twice over the coming months," says Deutsche Bank.
Andrew Bailey told an audience in Bangkok this month that the neutral rate has risen and the economy is proving resilient.
UBS has the November move followed by another in the first quarter of 2027, taking Bank Rate to 4.25%.
"Our baseline forecast includes two rises in the coming months, with the first increase likely to come as soon as November, just one week after the Budget," says Barclays.
Bank of England's Pill Sceptical About Hawkish Market Pricing
Huw Pill doubts the market's four hikes are needed, and he argues that from inside the hawkish minority on the Monetary Policy Committee.
"BoE Chief Economist Huw Pill has said that he is 'sceptical' of such market pricing. This is significant because Pill is among the 'hawkish' minority on the MPC that has already advocated higher interest rates," says Lloyds Bank.
MUFG doubts the Bank delivers the full 100 basis points and reads Pill's comment as aimed specifically at the need for four 25 basis point rises.
The scepticism concerns where the cycle ends.
"While a November hike by the BoE appears likely now, expectations for 100bp worth of tightening by June remain way too hawkish in our view," says ING.
Berenberg has this year's gilt yield increase predicated on four hikes it does not consider necessary to prevent another bout of persistent high inflation, while Commonwealth Bank of Australia puts the market's odds on the November move at about 95% and shares that call without following the market into a series of increases.
Oxford Economics Sees Inflation Back Near Target Within Two Years
"Oxford Economics does not expect a reversal of the recent margin squeeze to keep UK inflation materially above the Bank of England's 2% target over the next two years. Weak demand and stretched household finances will limit firms' ability to rebuild margins through higher prices," says Oxford Economics.
The house forecasts CPI at 3.6% in the fourth quarter of this year and 2.5% a year later, with import price inflation falling to 1% from 4% and unit wage cost growth at 3%.
Oxford Economics reaches that forecast while also expecting the Ofgem price cap to rise 23% in January.
"We think market pricing that implies around 120bps of rate hikes by the end of next year is excessive," says Oxford Economics.
Dovish Houses Point to Fiscal Tightening at the 28 October Budget
"We see scope for less [tightening than 113bps] which is a headwind for GBP: (i) The UK economy is operating below capacity, (ii) virtually no real wage growth constrains spending, (iii) the policy rate is near the top of the BOE's estimated 2% to 4% neutral range, and (iv) fiscal policy will likely turn more restrictive following the October 28 UK budget," says Brown Brothers Harriman.
"A November hike is fully priced in, but fiscal restraint weakens the case for a sustained cycle, favouring shorter-dated gilts," says TS Lombard.
Credit Agricole expects the Bank to deliver what it calls a dovish hike, one that fails to validate the aggressive expectations now priced and hurts sterling's relative rate appeal against the euro and the dollar, while the Budget's own financing requirement points to higher gilt issuance.
Carry Is Now the Sterling Argument
Bank of America moved to neutral on the pound against the euro this week after its target was met, judging that the good news is priced and that Budget event volatility looks underpriced.
"Greater market confidence in a Bank of England tightening cycle - we look for 25bp hikes in February and November - makes sterling a high-carry European currency," says ING.
Julius Baer has rising carry and an improved growth backdrop strengthening the sterling outlook despite the Budget's fiscal risks, particularly against the euro, where French politics burdens sentiment.
"More than four rate hikes represent a faster pace than the Fed's, laying the groundwork for a GBPUSD rally. The main thing is that the Treasury's draft budget does not disappoint the bulls," says Alex Kuptsikevich, chief analyst at FxPro.
Sterling's next move on rates runs through the Budget on 28 October, eight days before the MPC meets, with Pantheon's third hike turning on inflation holding above 4.0% into the summer.
