Traders expect the Bank of England (BOE) to implement up to four rate hikes by the end of 2027. Swap markets currently reflect approximately 53 basis points of tightening by December 2027. This exceeds the BOE's own July 2026 Monetary Policy Report, which projected a high probability of two hikes by the third quarter of 2027.
The European Central Bank (ECB) deposit rate is currently 2.25% after a hike in June 2026. Market expectations suggest the rate will rise to between 2.66% and 2.73% by early 2027, implying at least two more hikes. Potential action from the ECB is anticipated in September.
Inflation remains a key driver, with BOE projections showing a peak at 3.2%, exceeding the 2% target of both central banks. High energy prices, fueled by the US-Iran conflict, are contributing to inflation across food, transportation, and manufacturing.
The BOE's Monetary Policy Committee voted 6-3 to hold rates steady in July, indicating internal tension. Governor Andrew Bailey noted that market pricing reflects inflation risk premiums rather than certainties. Higher rate expectations are causing mark-to-market losses for bondholders in fixed-income markets.