UBS forecasts BoE rate hold and hawkish shift
UBS projects the Bank of England will maintain its 3.75% benchmark rate on September 17 while adopting a more cautious stance.
UBS expects the Bank of England to hold its benchmark interest rate at 3.75% at the September 17 meeting. This decision aligns with current market pricing and reflects a cautious approach to monetary policy.
The bank’s economists anticipate the Monetary Policy Committee will repeat the 6-3 vote split seen in July. Huw Pill, Megan Greene, and Catherine Mann are expected to push for a quarter-point hike again.
Economic pressures drive policy caution
UBS cites the recent escalation in the Middle East and rising energy prices as key factors. These developments push the Committee toward a more hawkish tone despite the rate hold.
Elevated energy costs coexist with stable wage and inflation expectations. This combination creates conflicting signals for policymakers, leaving them pulled in two directions.
The bank forecasts no rate changes for the rest of 2026. Two cuts are expected in 2027, though a rising risk of a pre-emptive hike exists if energy prices remain elevated.
Sterling outlook and budget impact
UBS remains constructive on the pound, targeting the euro at £0.8500 by year-end. Favourable capital flows support this positive currency stance.
Tactical weakness in the pound is flagged ahead of the October 28 Budget. Higher gilt yields pressure public finances, with risk skewed towards £0.8650.
Quantitative tightening pace will slow
The pace of quantitative tightening is expected to slow to £50 billion between October 2026 and September 2027. This is a reduction from the current £70 billion, driven by lower bond redemptions.
Active gilt sales are projected to hold steady at £20 billion per year. This stability in issuance complements the broader monetary strategy.
