City Economists Doubt Bank of England Will Raise Rates to 4.75% 2026

City economists are pushing back against financial market expectations that the Bank of England will raise UK interest rates to 4.75% by next summer, arguing that such a sharp tightening cycle is unlikely given weak evidence of second-round inflation effects.

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. 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.

Market-Implied Rates Point to Aggressive Tightening

Market-implied interest rates are calculated from the prices of a range of financial instruments, including derivatives such as swaps, to establish where traders think interest rates will be in future. These expectations currently suggest the Bank will raise rates at least four times over the next year, from 3.75% to 4.75% by July, and possibly to 5% by December 2027.

However, economists cite several reasons why these expectations may be too high. One is that these expectations are influenced by global factors and risk premia that may not reflect the UK's domestic inflation outlook.

Economists Challenge the Consensus

James Smith, a developed markets economist at the Dutch bank ING, expressed skepticism about the market pricing. “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,” he said.

Smith added: “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.” His comments came at a briefing in the City last week.

Why the Skepticism?

The main argument against the market's aggressive pricing is that there is little sign that the rise in energy costs is pushing up other prices sharply. If energy price increases are not feeding through into broader inflation, the case for rapid rate hikes weakens.

Economists also point out that market-implied rates can be distorted by technical factors, such as risk premia and liquidity conditions, rather than pure expectations of monetary policy. The background to this story is set out in Bank of England Interest Rate Decision: Inflation Hits 3.1%. A related thread runs through Bank of England Rate Rise: Burnham's Breathing Space Challenge. Earlier coverage in Bank of England Holds Rates at 3.75% as Inflation Fears Mount shows how the argument developed.

Key Takeaways for Investors and Borrowers

• Market pricing suggests the Bank of England will raise rates to 4.75% by next summer, but City economists are skeptical.
• ING's James Smith expects the Bank to signal the all-clear by next spring and potentially cut rates by the end of next year.
• Weak pass-through from energy costs to broader prices is a key reason for doubting aggressive tightening.
• Market-implied rates are derived from swaps and other derivatives, which can be influenced by technical factors.
• Borrowers and investors should watch for signals from the Bank rather than relying solely on market pricing.

Market Expectations vs. Economist Views

What to Watch Next

Investors and borrowers should monitor upcoming inflation data and Bank of England communications for clues on the future path of interest rates. Any signs that energy costs are feeding into other prices could validate the market's aggressive pricing, while continued weakness would support the economists' view. A closer look at the same subject appears in Middle East Crisis Keeps UK Interest Rates High. Anyone following the wider picture can start with Rising Oil Prices Could Force UK Interest Rates Up. The same theme surfaces in Rising Oil Prices Could Force UK Interest Rates Higher, which takes a different angle.

The debate highlights the uncertainty surrounding monetary policy and the importance of looking beyond market-implied rates when making financial decisions. Context on how this played out before sits in RBA Interest Rates Hit 15-Year High as Cash Rate Reaches 4.6%. A companion piece, Bank of England Independence: Time to End, approaches the same subject from another angle.