Could Bank of England defy markets and keep rates on hold?
Oil prices and events in the Middle East, are increasingly shaping market expectations for central bank policy. While markets and economists broadly agree on the ECB’s near-term trajectory—expecting two-to-three rate hikes in 2026—there is a clear divergence thereafter: economists anticipate rates will fall back toward neutral levels (~2%), whereas markets imply persistently tighter policy, the deposit rate remaining above 2.6% late into the decade.
The divergence is even more striking for the Bank of England. Options price three 25bp hikes to 4.5% by end-2026, starting in July, professional forecasters see rates on hold at 3.75%, before easing begins in 2027. Crucially, market pricing may be distorted by risk premia and hedging against geopolitical uncertainty, rather than pure expectations. So the signal from market pricing should be treated with care in the current environment. Here, the Sterling exchange rate could be exposed should expectations for near-term BoE rate hikes be disappointed.
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