UK economists see Bank Rate on hold through end-2027, but stronger growth and a 3.7% inflation peak leave November hike risk firmly alive.
Pound Sterling ended August with a mixed performance, holding broadly flat against the Euro but losing ground against the Australian and Canadian Dollars while remaining modestly higher against the US Dollar.
The Pound to Dollar (GBP/USD) exchange rate closed Friday at 1.3534, up 0.32% over August but well below the month’s 1.3675 high, while GBP/EUR finished almost unchanged at 1.1685.
The domestic backdrop is becoming awkward for the Bank of England rather than outright bearish for Sterling.
Pantheon Macroeconomics economists Robert Wood and Elliott Jordan-Doak are “reiterating our call for Bank Rate to remain on hold until end-2027”, arguing that the recent run of data has not fundamentally altered the Monetary Policy Committee’s preference to wait.
Yet the risks are moving.
“A higher inflation peak and solid growth mean greater risk of a rate hike; this November, if it comes,” they said.
That leaves the Pound with an unusual rates story: an economy performing better than the BoE expected, inflation moving higher again, but policymakers still reluctant to tighten.
UK Growth Keeps Surprising on the Upside
The economic case for an immediate rate increase is stronger than the labour-market headlines alone suggest.
GDP grew 0.4% quarter-on-quarter in Q2, beating the MPC’s 0.3% forecast, while August PMI data point to roughly 0.2% growth in Q3 rather than the BoE‘s 0.1% assumption.
“All told, the bulk of the data suggest that economic activity will continue to outperform the MPC’s expectations in H2,” Pantheon said.
Consumer confidence has also climbed towards a two-year high, while Lloyds’ Business Barometer rose to +53 in August from +49.
Pantheon argues that “healthy activity data continue to suggest little further disinflationary impulse from the domestic economy”, even if energy prices were to ease.
Wages are the softer part of the picture, although the economists are sceptical that the official figures tell the whole story.
“Official wage growth looks suspiciously low relative to the soft data,” they said, adding that the REC and Indeed wage trackers “suggest that the direction of pay growth is upward from here in any case.”
Inflation Peak Raised to 3.7%
Energy is making the decision harder.
Ofgem has raised the household energy price cap by 4% from October, taking the typical annual Direct Debit bill to £1,723.
Pantheon now expects UK CPI inflation to peak at 3.7% in January and February 2027, with another 7% utility-price increase assumed for Q1 next year.
Underlying services inflation is not behaving especially well either.
The UK services PMI output-price balance rose to 57.0 in August from 55.6, which Pantheon says is “consistent with underlying services inflation jumping to 4.1% three-months-on-three-months annualised, up from 2.7% in July.”
Still, the central call remains no hike.
“We have heard very little from the MPC over the past month to change our view that the majority of the Committee are desperate to sit tight and white-knuckle their way through the acceleration in inflation over the coming months.”
Governor Andrew Bailey’s Jackson Hole comments broadly supported that view.
Bailey said second-round inflation effects remained “quite subdued” and highlighted the softer labour market, adding that “I think we can watch this situation for the moment.”
Markets have moved the same way.
Only around 24bp of BoE tightening was priced by December late last week, with a full 25bp increase no longer priced until February 2027.
Pound Sterling Outlook: November Is the Hinge
The interesting part for Pound Sterling is that the market may now have moved close to Pantheon’s no-hike view.
That reduces the downside from further BoE repricing, while stronger activity and sticky inflation prevent the Pound’s domestic story from becoming obviously dovish.
We saw the other side of that argument in our latest GBP/USD forecast, where UBS continues to see Sterling reaching 1.40 against the Dollar despite Friday’s Warsh-driven setback.
Against the Euro, the autumn fiscal story remains more problematic, and we have previously highlighted the risk that the October Budget weighs on Sterling even if the economy holds up.
The coming week should help refine the domestic picture.
Pantheon expects Tuesday’s Nationwide house-price index to fall 0.2% month-on-month, manufacturing PMI to hold at 51.5, Thursday’s services PMI at 52.8 and Friday’s construction PMI to slip to 44.0.
Friday also brings the BoE Decision Maker Panel survey and another speech from Bailey.
Pantheon’s message is quite balanced: the BoE probably sits tight, but the combination of firmer growth, sticky wages and a 3.7% inflation peak means November cannot be dismissed.
That is not an obviously bearish combination for Pound Sterling, particularly now that markets have already priced away much of the 2026 tightening story.
