Markets push back BoE rate hike expectations to February 2027

Investors are no longer fully pricing a quarter-point interest ratehike by the Bank of England until February 2027, with bond yields extending their recent decline on Thursday, according to Reuters.

LSEG data showed markets pricing in 24.3 basis points of tightening by the Bank of England's December 17 policy decision, down from more than 25 basis points for most of August. Expectations increased to around 36 basis points of tightening by the February 4, 2027 meeting, Reuters said in the report.

Markets were pricing in less than 4 basis points of tightening for the Bank of England's September 17 meeting, implying roughly a 15% probability of a rateincrease. By comparison, traders were pricing in about 24 basis points of tightening at the European Central Bank's September 10 meeting.


British government bond yields continued to ease on Thursday. The 10-year gilt yield was down about 2 basis points at 5.01% at 0752 GMT, Reuters reported, after touching a two-week low of 4.979% on Wednesday before reversing some of the decline later in the session.

Most economists surveyed by Reuters have continued to expect the Bank of England to leave its benchmark interest rate unchanged at 3.75% for the remainder of the year. Financial markets, however, have generally anticipated another increase, reflecting concerns over the potential inflationary impact of geopolitical developments.

Bank of England Governor Andrew Bailey has previously indicated that the difference between economists' forecasts and market pricing partly reflected expectations of risks linked to a possible intensification of the U.S.-Iran conflict.

The outlook for British monetary policy remains complicated by persistent inflation pressures alongside signs of weakness in the labour market. Official data released last week showed consumer inflation accelerated to 2.9% in July, driven in part by higher household energy bills. At the same time, labour-market conditions remained subdued, an area that has been a key concern for policymakers assessing longer-term inflation risks.

Investors are also turning their attention to the annual gathering of central bankers in Jackson Hole, Wyoming. Federal Reserve Chair Kevin Warsh is due to speak on Friday, with markets looking for clues about the U.S. central bank's policy outlook and the broader direction of global interest rates.

The combination of softer gilt yields, cautious rate expectations and uncertainty over inflation and global growth is keeping markets focused on incoming economic data and central-bank guidance as investors assess the timing of the next Bank of Englandrate move.