BoE rate cut expectations pushed back

The Bank of England’s path to interest rate cuts was pushed further out on Tuesday as HSBC and Deutsche Bank updated forecasts that now point to a longer period of restrictive policy.

The revisions were published today in London as investors weighed the implications for borrowing costs, sterling and UK gilt yields. HSBC now expects the Bank Rate to be held until April 2026, while Deutsche Bank has moved its first cut call to December from November, citing stubborn inflation and policy caution.

HSBC said elevated UK inflation has complicated the timing of any easing, with the bank projecting the policy rate reaching 3.0 percent only by early 2027 from the current 4 percent. Deutsche Bank highlighted the narrow 5–4 split at the Monetary Policy Committee’s August meeting as a signal that Governor Andrew Bailey may prefer to wait for additional data before acting. Both institutions noted the sequencing challenge created by the 26 November Budget, which could influence gilt issuance and market conditions into year end.

Markets took the updates in stride. Interest rate futures continued to price a high probability that the MPC will keep rates unchanged at its 18 September meeting. Analysts said the communication from major banks would likely reinforce a data dependent posture among investors who have been recalibrating expectations after a sharp rise in long dated gilt yields earlier this month.

The inflation backdrop remains central. UK consumer price growth ran at one of the fastest rates among advanced economies in July, according to recent readings that have unsettled expectations for a quick return to the 2 percent target. Economists warned that persistent services inflation and second round effects could limit the speed of any easing cycle. At the same time, signs of softer activity in housing and consumer demand have created a difficult balancing act for policymakers.

Foreign exchange strategists said the updated forecasts could lend support to sterling in the near term by keeping the UK’s policy rate premium in place against peers. However, they cautioned that prolonged tight policy would also weigh on domestic demand and credit sensitive sectors. Gilt traders were focused on the maturity profile of future quantitative tightening operations, where any shift in the mix of sales could influence long end yields.

For households and businesses, a later start to rate cuts extends the period of elevated borrowing costs. Lenders are likely to remain cautious on mortgage repricing and corporate credit, and capital market issuance could stay volatile as investors demand higher term premia. The MPC has signalled that it will respond to incoming data; the next set of labour and inflation releases will therefore be pivotal.