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Official and private-sector forecasts show UK inflation falling far more slowly than eurozone and US inflation in 2027, which would keep UK interest rates higher for longer and the pound's yield support in place.
The pound is set to draw support against the euro and the dollar in 2027, as official and private-sector forecasts show UK inflation falling far more slowly than inflation in the eurozone and the US.
This higher-for-longer inflation profile will limit the Bank of England's ability to lower interest rates, in turn allowing sterling to keep its yield advantage over the euro and keep in touch with the high-yielding dollar.
A Sticky Inflation Profile
The Bank of England projects inflation peaking at 4.9% in the second quarter of 2027 and standing at 4.0% at the end of the year, its November Monetary Policy Report shows.
The Bank does not expect inflation to return to the 2.0% target until the third quarter of 2028 and it raised Bank Rate to 4.00% on 5 November by an 8-1 vote, with one member preferring a 50 basis point increase.
The Office for Budget Responsibility - the government's official forecaster - projects inflation averaging 3.4% in 2027, up from 3.1% this year, with a quarterly peak of 3.8% in early 2027, its October Economic and Fiscal Outlook shows.
The OBR expects inflation to "fall back to target halfway through 2028" as energy prices ease.
Sampling the private sector reveals a similar profile of above-inflation projections:
ING were out with its 2027 predictions on Tuesday and revealed forecasts for UK inflation averaging 3.6% in 2027, the highest of the six major economies in its headline forecasts, and still at 2.8% in the final quarter of the year.
ING's end-2027 forecast is 1.2 percentage points below the Bank of England's, although it still leaves UK inflation above target at the end of next year.
The ECB and the Fed Expect Inflation Back Near Target in 2027
Eurozone inflation stands to fall faster than UK inflation as oil and gas prices ease, because the eurozone does not carry the policy-driven pressures that hold up UK prices.
Eurozone core inflation held at 2.5% in October and services inflation at 3.3%, below the UK's 2.8% and 3.7%, although energy inflation stood at 20.8%, Eurostat's flash estimate shows.
ECB staff project eurozone inflation peaking at 3.6% in the final quarter of this year, their September projections show.
Eurozone inflation is then expected to fall to 2.5% in the second quarter of 2027 "and to hover close to 2.0% thereafter," say ECB staff.
ING forecasts eurozone inflation falling to 1.8% by the end of 2027 from 4.4% in the final quarter of this year, taking it below the ECB's 2% target.
US inflation is also forecast to fall faster than UK inflation next year.
Federal Reserve policymakers project PCE inflation, the Fed's preferred inflation measure, falling to 2.3% by the end of 2027 from 3.7% at the end of this year, the median of their September projections shows.
ING forecasts US CPI inflation falling to 1.8% by the end of 2027 from 3.9% in the final quarter of this year.
On ING's numbers, eurozone inflation falls 2.6 percentage points over the year and US inflation 2.1 points, against 0.9 points in the UK.
Money Markets Expect the Bank of England to Raise Rates for Longer
Money markets expect the Bank of England to keep raising interest rates for longer than the ECB and the Fed, in line with the slower fall in UK inflation.
Money markets price Bank Rate rising to 4.67% by November 2027 from 4.00% today, the equivalent of almost three more quarter-point increases, pricing on 10 November shows.
Markets fully price the next increase by the February meeting, although they put only even odds on a move in December.
Money markets price the ECB's deposit rate rising to 3.00% by October 2027 from 2.50% today, the equivalent of two quarter-point increases.
Markets price almost all of that tightening by July 2027.
However, ING expects the ECB to end its hiking cycle in December, "the ECB can keep its powder dry in 2027 and might even consider a rate cut towards the end of the year," says ING.
Money markets price two quarter-point increases from the Fed by July 2027, and no further move through October.
ING forecasts Bank Rate at 4.00% at the end of 2027, no higher than today and below market pricing.
"Based on leading indicators, we struggle to find the inflation in the pipeline that shook the BoE this week," says Berenberg in a recent update.
Pound Sterling Live Expects the Pound to Hold Its Rate Support in 2027
Based on the 'sticky inflation' environment, Pound Sterling Live expects the pound to extend its gains against the euro in 2027 as UK inflation falls more slowly than eurozone inflation.
The call comes as the pound-to-euro exchange rate trends higher, reaching 1.20 in November.
Bank Rate stands 1.5 percentage points above the ECB's 2.50% deposit rate and money markets price that gap widening to around 1.7 points by late 2027.
The euro is meanwhile undermined by French fiscal stress, which should remain a concern into France's looming elections.
The pound is also set to find support against the dollar as US inflation returns towards target faster than UK inflation.
Money markets price Bank Rate around a quarter point above the effective federal funds rate by late 2027, from 0.1 points today.
The pound-to-dollar rate trades at 1.3396.
Pound Sterling Live continues to hold a constructive medium-term view on the pound's prospects; the economy is performing ahead of expectations and the Budget passed without incident.
For the pound to lose its rate advantage over the euro, UK inflation must fall as quickly as the ECB and ING forecast eurozone inflation falling in 2027.
