Sterling 'edges higher' ahead of BoE decision, markets pricing in 'three more hikes' are being'

Last week’s Autumn Budget announcement was a non-event for sterling and gilts, as the government avoided any dramatic or unexpected moves, and the actual news had been largely priced in.

The fiscal headroom was rebuilt to levels seen as just about acceptable for now, tax rises were modest and targeted largely at banks and energy support measures were so small that the growth and inflation implications will be negligible.

While markets have taken the budget in stride, the lack of action to tackle welfare spending or clarity on defence spending means that we are left with more questions than answers. The pound, however, has edged higher against both the dollar and the euro as we head into Thursday’s BoE decision.

We expect the MPC to raise rates, a move that is almost fully priced in, given resilient growth and stubbornly high inflation. The vote split and the guidance will matter more for the pound than the decision itself. We expect a split vote and open-ended guidance that provides no explicit commitment to further rate increases in 2027.

Market expectations of three more hikes after this week's meeting strike us as overly aggressive, and we expect the MPC to push back against them.