City economists sceptical of market expectations for sharp UK rate rises

Economists doubt Bank of England will raise rates to 4.75% by next summer

By LineZotpaper AI staff

Published25 October 2026

Read Time2 min

Sources3 outlets

Financial markets are pricing in four or five interest rate rises from the Bank of England over the next year, but City economists believe such aggressive tightening is unlikely given limited evidence that higher energy costs are feeding into broader inflation.

Market-implied expectations, derived from swaps and derivatives, suggest the bank rate will rise from its current 3.75% to 4.75% by July 2027 and possibly 5% by December 2027. However, several economists argue that prediction is too high.

James Smith, a developed markets economist at ING, said: "If you look at the swaps market, and you look at what's priced in for the Bank of England, you've got four rate hikes and then no cuts ever. And I think you'd be hard-pressed to find anybody that really agrees with that." Smith suggested the Bank could be "sounding the all clear" by spring 2027 and cutting rates again by the end of next year.

Sanjay Raja, chief UK economist at Deutsche Bank, also expressed doubt. "I do not believe that any mainstream forecaster thinks the Bank of England will hike to 5% by the end of next year with the information set we have today," he said. Raja calculated that much of the forecast rise is actually a "baked-in risk premia" to protect against uncertainty. Stripping that out leaves only about half a percentage point of expected hikes. Deutsche Bank's base case is for a rise to 4.25% by February 2027, then a hold.

Oxford Economics also forecasts a peak of 4.25% in February, "significantly below" market expectations. Morgan Stanley expects rises in November and February with a hold thereafter. Even Huw Pill, the Bank of England's hawkish chief economist, has suggested market expectations are running too hot.

The Bank of England is widely expected to raise rates to 4% at its next meeting on 5 November.

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Expected peak bank rate: market vs economists' forecasts

Market expectation derived from swaps and derivatives; economists' forecasts are base cases. Source: The Guardian

Analysis

Why This Matters

Higher interest rates would increase mortgage costs for millions of UK households and raise borrowing costs for businesses.
The gap between market pricing and economist forecasts highlights uncertainty around inflation and energy prices, especially with the Iran war affecting oil.
The Bank of England's actual decisions could significantly diverge from current market expectations, affecting currency and bond markets.

Background

The Bank of England has been raising rates to combat inflation, which stood at 3.5% in September, above the 2% target. The next rate decision is on 5 November, with a widely expected quarter-point rise to 4%. The current Middle East crisis has driven up oil prices, which has influenced market pricing for rates.

Key Perspectives

Financial markets (as reflected in swaps): expect the bank rate to rise to 4.75-5% by late 2027, implying four or five rate hikes.
James Smith (ING): says few people agree with the market pricing; expects the Bank could cut rates again by end of next year.
Sanjay Raja (Deutsche Bank): says no mainstream forecaster expects a rise to 5%; estimates only about 50 basis points of hikes after stripping out risk premia.
Huw Pill (Bank of England chief economist): has expressed scepticism that four rate rises are needed.
Oxford Economics: forecasts a peak of 4.25% in February, well below market expectations.

What to Watch

The evolution of oil prices, which have been closely correlated with rate expectations since the Iran war began.
The Low Pay Commission's recommendation on the national living wage, which could add pressure for further rate rises if larger than expected.
The Bank of England's November meeting and its forward guidance on the path of rates.

Sources

Interest rates unlikely to reach 4.75% by next summer, say City economists · The Guardian
Interest rates unlikely to reach 4.75% by next summer, say City economists · The Guardian
Interest rates unlikely to reach 4.75% by next summer, say City economists · The Guardian

Checked

12 claims in this story checked against 1 source: 9 supported.

Show each claim

SupportedCity economists are sceptical of market expectations for sharp UK rate rises.Business | The Guardian: “Financial markets are wrong to predict the Bank of England will raise UK interest rates by a full percentage point or more by next summer, City economists believe.”
SupportedEconomists doubt the Bank of England will raise rates to 4.75% by next summer.Business | The Guardian: “Financial markets are wrong to predict the Bank of England will raise UK interest rates by a full percentage point or more by next summer, City economists believe.”
Partly supportedMarkets are pricing four or five rate rises over the next year, taking the rate from 3.75% to 4.75% by July 2027 and possibly 5% by December 2027.Business | The Guardian: “According to market-implied interest rate expectations, the Bank is likely to raise interest rates at least four times over the next year, lifting the bank rate from 3.75% today to 4.75% by the end of July, and possibly to 5% – meaning five rises – by December 2027.”
SupportedEconomists consider sharp tightening unlikely because there is little evidence higher energy costs are pushing up other prices sharply.Business | The Guardian: “But a number of City experts believe such a sharp tightening cycle is unlikely, given there is little sign that the rise in energy costs is pushing up other prices sharply.”
SupportedJames Smith said: “If you look at the swaps market, and you look at what's priced in for the Bank of England, you've got four rate hikes and then no cuts ever. And I think you'd be hard-pressed to find anybody that really agrees with that.”Business | The Guardian: ““If you look at the swaps market, and you look at what’s priced in for the Bank of England, you’ve got four rate hikes and then no cuts ever. And I think you’d be hard-pressed to find anybody that really agrees with that,” said James Smith, a developed markets economist at the Dutch bank ING.”
Partly supportedSmith suggested the Bank could signal the all-clear by spring 2027 and cut rates again by the end of next year.Business | The Guardian: ““By next spring, I think they [the Bank] could be sounding the all clear, and by the end of next year they could be cutting rates again,” Smith told a briefing in the City last week.”
SupportedSanjay Raja said he did not believe any mainstream forecaster expected the Bank to raise rates to 5% by the end of next year given the information available.Business | The Guardian: ““I do not believe that any mainstream forecaster thinks the Bank of England will hike to 5% by the end of next year with the information set we have today,” Raja said.”
SupportedRaja calculated that risk premia account for much of the forecast rise and stripping them out leaves about half a percentage point of expected hikes.Business | The Guardian: “He has calculated that a lot of the forecast interest rate rises is actually “baked-in risk premia” – where investors require an extra return to protect them from uncertainty or instability. “Once we strip that out, we have estimated that there is only really ~50bps [half a percentage point] of hikes pencilled in,” he said.”
SupportedDeutsche Bank's base case is a rise to 4.25% by February 2027, followed by a hold.Business | The Guardian: “Deutsche Bank’s base case is for the Bank of England to take the bank rate to 4.25% by next February and then hold rates there until the end of 2027.”
Partly supportedOxford Economics forecasts a peak of 4.25% in February, significantly below market expectations.Business | The Guardian: ““We forecast the [Bank’s] monetary policy committee will raise interest rates by 25bps [a quarter of a percentage point] at its November and February meetings, taking the bank rate to 4.25%. This is significantly below the peak in money market expectations, which currently point to the bank rate peaking between 4.75% and 5%,” they told clients last week.”
SupportedHuw Pill has suggested market expectations are running too hot.Business | The Guardian: “Even Huw Pill, the Bank’s hawkish chief economist, has suggested market expectations are running too hot.”
SupportedThe Bank of England is widely expected to raise rates to 4% at its next meeting on 5 November.Business | The Guardian: “The Bank of England is widely expected to raise interest rates to 4% at its next meeting, on 5 November, after UK inflation rose further above its target in September to 3.5% .”