Two BoE Hikes, Then What? The Debate Facing Pound Sterling
Pound Sterling edges higher against the Euro and US Dollar as Pantheon weighs a third BoE hike, while ING sees scope for rate cuts later in 2027.
Pound Sterling held modest gains against the Euro and US Dollar on Wednesday as economists offered sharply different readings of the latest UK inflation figures.
The Pound-to-Dollar exchange rate was trading at $1.3384, up 0.09%, while GBP/EUR stood at €1.1921.
Pound Sterling was weaker against the Australian and New Zealand Dollars, leaving the day’s performance mixed despite inflation exceeding expectations.
The 21 October release showed annual CPI rising to 3.5% in September from 3.1% in August, above the 3.4% consensus.
Pantheon Macroeconomics expects increases in November 2026 and February 2027 and is close to adding a third, while ING anticipates the same first two moves but a return to cuts by November 2027 if wider inflation pressures remain contained.
Airfares divide the reading of services inflation
Motor fuels supplied the largest upward contribution to the headline acceleration, but services inflation also rose to 3.7% from 3.4%.
Lloyds senior UK economist Nikesh Sawjani notes that headline inflation is half a percentage point above the Bank of England’s July projection, whereas core and services inflation are each only 0.1 percentage point higher.
He writes: “To us, the much larger overshoot in headline inflation therefore continues to look predominantly like an energy story rather than evidence, at this stage, of a similarly large broadening in underlying inflation pressures.”
Airfares fell as the summer holiday season ended, but by less than a year earlier, lifting their contribution to annual inflation.
Pantheon thinks that smaller decline follows logically from the unusually weak summer increase:
“But July and August airfares increases combined were also the weakest since 2003. Less summer strength meant less to unwind in September.”
It therefore expects the correction to carry forward, rather than disappear as a temporary statistical disturbance.
ING puts more weight on measures that remove volatile components from services inflation:
“Remove these jumpy categories, as well as those that are indexed, and the Bank of England’s preferred measure of ‘core services’ inflation is still relatively contained – albeit up slightly over the past few months.”
Pantheon reports: “Underlying services inflation accelerated to 3.9% year-over-year in September, from 3.7%, its highest since March.”
ING also points to food prices, where it had expected the energy shock to be more visible by now.
It writes: “Partly as a result, our calculation of ‘energy intensive’ inflation has actually fallen this year and shows little-to-no sign of picking up.”
“This remains the case even after stripping out last year’s increases in water bills and car taxes, which would otherwise distort the picture.”
The BoE is trying to prevent higher energy costs becoming embedded in wages and other prices, prolonging inflation beyond the original shock.
Two precautionary hikes or a longer cycle?
The policy divide has sharpened since Tuesday’s jobs figures strengthened the case for a November increase.
Pantheon now forecasts headline inflation peaking at 4.8% in February 2027 and remaining above 4% until July, a prolonged period in which it believes wage and price-setting risks would grow.
The consultancy says: “Strong growth, stable or falling labour market slack and surging inflation mean the MPC will hike in November. We expect another hike in February and are very close to adding a third in May, or earlier.”
Pantheon has not yet adopted that third hike.
ING instead expects inflation to peak briefly around 4% this winter and regards its anticipated hikes as precautionary.
“We expect hikes in both November and February, but by the spring, we think the Bank will be more confident in calling the ‘all clear’ on second-round effects.”
“If we’re right, then we think the Bank can start cutting rates again by next November and into 2028.”
The next BoE decision is on 5 November, with Bank Rate at 3.75%.
Lloyds recorded roughly four quarter-point increases priced by July 2027 in its post-release assessment, a more aggressive path than either ING’s forecast or Pantheon’s current two-hike call.
Sawjani writes: “Against that backdrop, the latest data continue to argue for the MPC to remain patient rather than respond mechanically to higher headline CPI, although the combination of rising inflation and resilient activity means that patience is likely to be tested increasingly over coming months.”
TLDR: What This Means for the Pound
With a November increase already heavily anticipated, support for further GBP/USD and GBP/EUR gains depends partly on how much tightening investors expect after it. Pantheon’s evidence of persistent domestic pressure could help sustain those expectations, although it has yet to endorse the full path priced into markets.
ING’s scenario would leave less lasting interest-rate support for Pound Sterling: two precautionary increases would eventually give way to cuts. If incoming data favour that view, investors could reduce the returns they expect from UK assets before the first cut arrives.
The next CPI release is due on 18 November, after the BoE’s decision. Whether food prices and less volatile services begin to show stronger pressure will help determine whether a November hike starts a longer cycle or proves one of a limited number of precautionary moves.
