The Bank of England is expected to maintain its interest rate at 4% on September 18, according to a Reuters poll involving 67 economists. While most predict a quarter-point cut in the fourth quarter of 2023 and early next year, a growing number believe the Bank might avoid further easing in 2025.
Inflation has been rising, projected to reach 4% in September, with a return to the 2% target not anticipated until mid-2027. All surveyed economists agree on maintaining the rate in September, with 42 expecting a cut in the fourth quarter. Upcoming inflation and labour data due on September 16-17 will influence decisions for November.
Wage Growth and Inflation Trends
Wage growth remains high at 5%, while inflation is expected to average 3.8% this quarter and 3.6% in the fourth quarter. Some economists caution that the persistence of inflation makes further cuts risky, suggesting drifting expectations.
The UK economy is projected to grow modestly between 0.2–0.4% quarterly through 2026, with annual growth averaging just above 1%. Additionally, the Bank of England continues to reduce its balance sheet, with projections of a £50–100bn reduction in bond holdings over the next year.
The upcoming Bank of England decision this Thursday is widely expected to be a hold, keeping the rate at 4%. This pause is significant because it follows a series of cuts from the 5.25% peak we saw back in 2023. The real play for us is not this week’s meeting, but correctly positioning for the sharply divided outlook for November and beyond.
Inflation remains the core issue, with projections showing it will hit 4% this month. We saw a similar situation in the spring of 2024 when inflation briefly touched the 2% target only to rebound, which justifies the Bank’s current caution. This persistence, combined with wage growth still running at a high 5%, is why nearly a third of analysts now believe the cutting cycle is finished for the year.
Given this uncertainty, we should anticipate a spike in volatility around the November meeting date. The key data points to watch are the inflation and labor market numbers due out tomorrow and Wednesday. Any deviation from expectations in this data will cause a sharp repricing in short-sterling or SONIA futures contracts for the fourth quarter.
Opportunities in Currency Derivatives
We also see opportunities in currency derivatives, particularly for the British Pound. If the Bank’s statement this week sounds more concerned about inflation than growth, GBP could rally, making call options attractive. However, any signal that a November cut is still the default plan could weaken the pound, benefiting anyone holding puts on GBP/USD.
This is all happening against a backdrop of a very weak economy, which is only expected to grow by around 0.3% per quarter. The Bank is also continuing to reduce its bond holdings, a form of passive tightening that works against the need for lower rates. This creates a challenging push-pull dynamic, where fighting inflation is directly at odds with supporting sluggish economic growth.
