Financial markets are overestimating how sharply the Bank of England will raise interest rates over the coming year, according to leading City economists who believe borrowing costs could start falling again by the end of 2027.
Market pricing currently suggests the Bank will implement at least four quarter-point rate increases over the next twelve months, pushing the bank rate from its current 3.75% to 4.75% by the end of July 2027, and potentially to 5% by December, according to The Guardian.
However, several prominent economists argue this forecast is significantly inflated. James Smith, a developed markets economist at ING, told a City briefing that finding anyone who agrees with the market’s expectations would be difficult.
“If you look at the swaps market, and you look at what’s priced in for the Bank of England, you’ve got four rate hikes and then no cuts ever. And I think you’d be hard-pressed to find anybody that really agrees with that,” Smith said.
He suggested the Bank could signal an all-clear by next spring and potentially begin cutting rates again before the year ends.
Why markets are pricing in higher rates
Economists point to several factors driving the gap between market expectations and expert forecasts. Market-implied interest rates, calculated from derivatives such as swaps, have been closely tracking oil prices since the Iran conflict began, according to the report.
Traders face significant financial risks if they bet against rate rises whilst oil prices continue climbing. Smith explained that many investors were caught out at the start of the current Middle East crisis when they positioned for further cuts, making them reluctant to take similar risks now.
Sanjay Raja, chief UK economist at Deutsche Bank, also doubts the market pricing. He calculated that much of the forecast increase represents “baked-in risk premia” – extra returns investors demand to protect against uncertainty – rather than genuine expectations of rate rises.
“Once we strip that out, we have estimated that there is only really around 50 basis points of hikes pencilled in,” Raja said. Deutsche Bank’s own forecast sees the bank rate reaching 4.25% by February 2027 and holding there until year end.
Limited inflation pressure from energy costs
City experts believe a sharp tightening cycle is unlikely because rising energy costs show little sign of pushing up other prices sharply. The Bank of England is widely expected to raise rates to 4% at its 5 November meeting, after UK inflation climbed to 3.5% in September, above the 2% target.
Goldman Sachs said its probability-weighted forecast remains “notably below market pricing”, whilst Morgan Stanley’s base case anticipates rises only in November and February, with rates on hold thereafter. Oxford Economics forecasts the monetary policy committee will raise rates by a quarter point at both meetings, taking the bank rate to 4.25% – significantly below the 4.75% to 5% peak priced into financial markets.
Even Huw Pill, the Bank’s chief economist known for hawkish views, has expressed scepticism about market expectations. At an International Monetary Fund meeting in Bangkok this month, he questioned whether the Bank would need to raise rates four times over the next year.
What this means for Poles in the UK
If City economists prove correct and the Bank of England raises rates less sharply than markets expect, Polish households in Britain with variable-rate mortgages or tracker loans could see smaller increases in monthly payments than currently feared. Someone with a £200,000 mortgage on a standard variable rate would pay roughly £83 more per month at 4.25% compared to around £166 extra at 5%.
The 5 November Bank of England meeting will be crucial – a rise to 4% is widely anticipated, affecting new mortgage deals immediately. Poles considering remortgaging should compare fixed-rate offers now, as these reflect current market expectations rather than economists’ more optimistic forecasts. Savings accounts may see interest rates plateau sooner than expected if rate rises prove limited.
Those sending money to Poland should monitor exchange rate movements, as lower-than-expected UK rate rises could weaken the pound against the złoty. The Bank of England publishes its decision and inflation report at noon on 5 November, available at bankofengland.co.uk.