BoE Feb hike could be on the cards but MPC unlikely to endorse market pricing for further tightening in 2027 today

We see a hike as a done deal this week and another, while not yet our baseline scenario, is possible in February should inflation stay above 4%, commodity prices remain high and activity remain resilient.

We remain of the view, however, that aggressive tightening is unwarranted, for four main reasons:

• There are no clear signs of second-round inflation effects, nor do we think that there will be. Total pay growth including bonuses has slowed to near six year lows, and Bailey himself has called broader price pressures from the energy shock subdued. The near 4% minimum wage hike in the budget is a risk, though none of this is yet the broad-based pickup in wage and price -setting the MPC needs to see before hiking aggressively.
• The UK jobs market remains fragile. The fall in unemployment to 4.7% is welcome, but hiring remains weak. Vacancies are at their lowest levels since 2014, payrolls have fallen by more than 200k since Labour took office and even recent monthly gains have been small.
• High gilt yields are doing some of the BoE’s work for it. UK borrowing costs rose to multi-decade highs last month and this is tightening conditions without any help from the MPC - Taylor has argued that market rates are more restrictive than when the bank delivered the last hike in 2023 when inflation was at 6.8%.
• Any positive news on Iran would quickly dial back tightening bets. We see it clear that the main reason for the MPC to be hiking at all is due to the energy crisis, so it would stand to reason that any good news here would alleviate pressure on the bank to act. Our base case is a protracted stalemate, but we think an agreement of sorts in early 2027 is possible, which would materially weaken the case for higher rates.

We expect the BoE to deliver a 25bp hike on Thursday, but we do not think the MPC will endorse market pricing for further tightening in 2027. Guidance should be open-ended enough to rule nothing out, yet with pricing so stretched, the bar for a dovish surprise is low.

A 6-3 vote, hikes made conditional on second-round effects, any pushback on market pricing, or forecasts showing a medium-term inflation undershoot would each be bearish for sterling and could send it lower on Thursday. An 8-1 or unanimous vote, on the other hand, with hawkish rhetoric that raises deeper concerns over the inflation trajectory would be clearly bullish for the pound.