Sterling heads into BoE meeting in a 'strong position' with markets pricing four rate rises

Sterling enters into Thursday’s Bank of England meeting in a strong position as markets bet on rate rise this week and three further hikes in 2027. We agree that a 25bp hike, the first since August 2023, is on the way, though we expect it to come in a divided vote.

Inflation has overshot the bank’s forecasts, while activity has proven more resilient than expected and the jobs market is showing early signs of bottoming out. Several of the members who voted to hold last time have since signalled that a hike may soon be warranted, and we expect a 7-2 vote, with Dhingra and Taylor the likely dissenters. A 6-3 split is a possibility, however, and is a bearish tail risk for the pound.

The question is whether the MPC will want to promise more, and we don’t think that it will. We expect the guidance to be vague enough to keep February ‘live’ without guaranteeing anything.

We see little need for aggressive tightening in 2027: second-round effects are limited, the jobs market remains fragile and high gilt yields are doing some of the bank’s work for it. Swaps see four total hikes in the next twelve months, which seems far too excessive to us, leaving the bar for a dovish surprise low.

A 6-3 vote, hikes made conditional on second-round effects, or any pushback on market pricing would likely send sterling lower. An 8-1 or unanimous vote with hawkish rhetoric would be clearly bullish for the Pound.