Traders have ramped up bets on further Bank of England tightening this week, repricing the outlook for UK interest rates after Governor Andrew Bailey struck a notably hawkish tone in testimony before Parliament. The shift marks a reversal from just two weeks earlier, when softer inflation signals had pushed expectations for the next BoE move out into 2027.
Bailey appeared before the Treasury Select Committee on September 8, telling lawmakers that inflation risks were skewed to the upside as the conflict in the Middle East keeps energy costs elevated. Market commentary described the tone of the appearance as among the most hawkish of his recent public remarks, a shift that traders read as an acknowledgment that the Bank may need to act sooner than previously signaled if energy-driven price pressure persists.
Interest-rate swaps have moved to reflect that view. Pricing now implies roughly three quarter-point increases over the coming twelve months, enough to lift Bank Rate to around 4.50% from its current 3.75%, with the first move priced by December and additional tightening seen stretching into the spring. That marks a meaningfully more aggressive path than economists had been forecasting only weeks ago.
The repricing also puts markets well ahead of professional forecasters. A Reuters poll of 65 economists found unanimous agreement that the BoE will hold its rate at 3.75% when the Monetary Policy Committee meets on September 17, with the large majority expecting no further change at all this year. The gap between that consensus and what swaps are now pricing underscores how quickly sentiment has moved on the back of the energy shock and Bailey's remarks.
Sterling has drawn support from the shift. GBP/USD climbed to its firmest levels since late August this week, buoyed by the reassessment of BoE policy even as the dollar found some footing of its own on stronger U.S. inflation readings. The move stands in contrast to sterling's weaker patch in late August, when a pullback in oil prices had eased inflation concerns and encouraged traders to push BoE hike expectations further out.
Energy markets are the common thread behind the repricing. Brent crude has traded near multi-year highs this week as the Middle East conflict shows no sign of resolution, a dynamic that is also feeding into more hawkish rate expectations for the European Central Bank, which raised its own key rate on September 10. Analysts note that UK inflation, like eurozone inflation, remains vulnerable to further energy-driven upside surprises while the conflict persists.
Attention now turns to the September 17 MPC decision and the data due before it, including the next UK inflation reading, for signs of whether the Bank's own guidance will begin to validate the more hawkish path currently being priced by markets.