Sterling strengthened against major currencies after UK August labour market data firmed expectations of a 25 bps Bank of England rate rise to 4.00% on 5 November. Over the three months to August, the employment rate rose 0.2ppt to 75.3% while the unemployment rate fell 0.2ppt to 4.7%, the lowest since July 2025 and below the BoE’s Q3 projection of 5.0%. Private sector regular pay growth came in at 3.0% year on year, up from 2.9% in July and in line with both consensus and the BoE’s Q3 forecast.
Market Expectations and Rate Path
Markets have leaned further into tightening. The swaps curve implies 95% odds of a November increase and, beyond that, 100bps of hikes over the next 12 months. Wage dynamics point to services inflation remaining sticky above the BoE’s 2% target, but the policy debate is tempered by signs of slack: the economy is operating below capacity, and the policy rate sits near the top of the BoE’s estimated 2% to 4% neutral range. Fiscal settings are also expected to turn more restrictive after the 28 October UK budget, a backdrop that could limit how far rates need to rise.
