Interest rates unlikely to reach 4.75% by next summer, say City economists
Summary
Financial markets price in at least four Bank of England rate increases by next summer, taking the bank rate from 3.75% to 4.75%, with some pricing pointing to 5% by December 2027. Several City economists say that path is unlikely, citing limited evidence that higher energy costs are spreading sharply to other prices and the possibility that market pricing includes a premium for uncertainty.Key Facts
- Market-implied expectations point to at least four rate increases over the next year, from 3.75% to 4.75% by the end of July.
- James Smith of ING said the market pricing of four increases and no future cuts is unlikely to match the Bank of England’s eventual path.
- Smith said the Bank could signal by spring that inflation risks have eased and could cut rates again by the end of next year.
- Sanjay Raja of Deutsche Bank said a rise to 5% by the end of next year seems less likely based on current projections.
- Raja estimated that, after removing risk premiums from market pricing, investors have priced in about half a percentage point of rate increases.
- Deutsche Bank’s base case is for the bank rate to reach 4.25% by next February and stay there through the end of 2027.
- The Bank of England is widely expected to raise rates to 4% at its 5 November meeting, following UK inflation of 3.5% in September.
- Morgan Stanley expects rate increases in November and February, but said a larger-than-expected rise in the national living wage could prompt further increases.
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