Investors see little chance of a base rate increase before next year as gilt yields continue to edge lower
Market pricing as of Thursday indicated that investors do not fully expect a quarter-point rate rise from the Bank of England (BoE) until its February 2027 meeting, as UK gilt yields extended a gradual decline following a brief reversal on Wednesday.
Data from LSEG showed 24.3 basis points of rate increases priced in ahead of the BoE's 17 December announcement, down from more than 25 basis points (bps) for most of August, with 36bps priced in by the 4 February meeting.
Ahead of the Bank of England's 17 September meeting, fewer than 4bps of tightening were priced in — implying roughly a 15% probability of a hike. That compares with 24bps of tightening priced in ahead of the European Central Bank's 10 September decision.
UK 10-year gilt yields were down 2bps on the day at 5.01% as of Thursday morning, close to the two-week low of 4.979% reached on Wednesday before yields recovered later in the session.
Most economists in a Reuters poll have long anticipated the BoE holding rates at 3.75% through the year, while financial markets have generally priced in an increase. Governor Andrew Bailey attributed the divergence to markets factoring in the risk of an escalation in the US-Iran conflict.
The BoE's current rate of 3.75% has been held at every meeting in 2026. The Monetary Policy Committee held the base rate for a fifth consecutive meeting on 30 July, with the vote split widening to 6–3, up from 7–2 in June.
Inflation data published last week showed UK consumer prices rose to 2.9% in July, driven by higher household energy costs. The labour market, which MPC members have identified as the primary source of longer-term inflation concern, remained subdued.
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