Just a few months ago, the consensus was that the Bank of England would spend 2026 gently easing rates downward. That consensus is now dead.
Money markets have done a full U-turn, pricing in two 25-basis-point rate hikes before December. The Bank Rate, currently sitting at 3.75%, could climb to 4.25% if traders are reading the tea leaves correctly.
What changed and why it matters
The pivot traces back to a familiar villain: inflation that refuses to cooperate. UK inflation recently printed at 2.8%, meaningfully above the BoE’s 2% target. Earlier this year, markets were forecasting one to two rate cuts. Now they’re forecasting the exact opposite.
The culprit behind the inflation stubbornness is largely energy prices, which have spiked in the wake of the US-Iran conflict. Geopolitical tension pushed oil higher, oil pushed energy costs higher, and energy costs pushed the UK’s inflation readings further from where the BoE wants them.
