Economists expect two UK rate rises, ING still favours a hold, and Lloyds sees growing pressure to act after the BoE leaves Bank Rate at 3.75%.
The Bank of England moved closer to raising interest rates on Thursday, but its warning failed to satisfy markets and the Pound fell against its major peers.
The Monetary Policy Committee held Bank Rate at 3.75% in a 6-3 vote, with Huw Pill, Megan Greene and Catherine Mann preferring a quarter-point increase.
Pantheon Macroeconomics still expects hikes in November and February, while ING believes falling energy prices could allow the Bank to avoid raising rates altogether.
At the time of writing, the British Pound to US Dollar exchange rate (GBP/USD) stood at 1.3356, down 0.20% on the day, while the British Pound to Euro exchange rate (GBP/EUR) was 0.25% lower at 1.1639.
Sterling also lost 0.50% against the Australian Dollar, 0.41% against the New Zealand Dollar and 0.18% against the Canadian Dollar.
All five crosses dropped immediately after the midday announcement.
Why a tougher BoE message failed to lift the Pound
Pantheon argues that the market had set a demanding threshold for a hawkish surprise.
In its immediate assessment, the consultancy noted that less than one-and-a-half quarter-point hikes were priced by year-end after the decision, compared with as many as two earlier in the week.
It retained its forecast:
“We are happy to continue forecasting the MPC to hike rates in November and in February because we see today’s minutes as more hawkish than July and consistent with a hike soon (subject to energy prices etc.).”
Its argument centres on Governor Andrew Bailey and Deputy Governor Clare Lombardelli, whose comments suggest they could join the three existing supporters of a hike, producing a five-member majority.
Lombardelli said: “The outlook for energy prices is uncertain and could change in the coming weeks, but the case for raising Bank Rate is building the longer the conflict continues without lasting resolution.”
Pantheon also sees growth holding up and spare capacity stabilising, reducing the protection a weak economy would otherwise offer against inflation.
The Pound had already faced pressure following Wednesday’s Federal Reserve rate hike, adding to the challenge for Sterling against the Dollar.
ING’s hold forecast depends on cheaper energy
ING expects oil and gas prices to decline sufficiently to keep Bank Rate unchanged.
“Our global base case assumes that they will. That would enable the Bank to stay on hold, as it voted to do today, and even cut rates in 2027. But if we’re wrong, it’s clear the Bank is prepared to hike in November – and if it does, we suspect it will do so again in the new year.”
ING economist James Smith argues that the UK has less room for higher rates than the US.
“The jobs market is weaker, fiscal policy is tighter and rate-sensitive sectors are under more obvious pressure. The majority of those who voted to keep rates on hold made the point that financial conditions are bearing down on economic activity right now.”
The bank sees little evidence that higher energy bills are spreading into broader inflation, pointing to easing food inflation and falling inflation in energy-intensive goods and services.
It calculates that unchanged wholesale gas prices could nevertheless mean a 25% rise in the household energy cap in January.
ING still questions the scale of tightening priced by investors:
“The case for higher UK rates remains far from compelling, and though we aren’t ruling out a rate hike later this year if energy prices remain high, market pricing for the Bank of England continues to look disconnected from the current economic reality.”
Lloyds: the inflation outlook has worsened, but persistence matters
Lloyds economist Nikesh Sawjani highlights the upward revision to the BoE’s inflation outlook, with CPI now expected to rise slightly above 4% in early 2027, compared with a peak around 3.2% in July’s forecast.
Services inflation has eased from 4.5% in March to 3.4% in August, however, and evidence of broader wage and price effects remains limited.
“Higher energy prices raise inflation directly and increase the risk of future persistence, but inflation expectations, pay settlements and firms’ pricing behaviour have not yet deteriorated sufficiently to justify an immediate response.”
Lloyds also notes that quoted two-year mortgage rates are around 95 basis points higher than before the conflict, already restraining household activity despite an unchanged Bank Rate.
Its assessment puts particular weight on the 2027 wage-setting round, when workers and employers will respond to the renewed squeeze from energy bills.
Gilt sales change, with auctions temporarily paused
The BoE also agreed to unwind £368bn of monetary-policy gilt holdings by 2034, using £20bn of annual sales alongside maturities, for an average £46bn reduction each year.
A separate £120bn of the longest-dated gilts will be retained to back banknote issuance.
Pantheon sees that retention as easing sale pressure on the long end of the gilt market, while Lloyds stresses the greater predictability of the multi-year plan.
Implementation is still being settled: the BoE’s September minutes confirm that auctions will pause while officials consider sales to the Government, with operational details due by April 2027.
Why a November hike may offer Sterling limited relief
The next rate decision is on 5 November, but expectations for subsequent meetings also matter for the Pound.
ING argues that roughly four hikes over the coming year would be excessive.
If markets scale back those expectations, we think a November increase alone may not be enough to restore the Pound’s interest-rate support.
