The annual report from the Bank of England includes insights from MPC members Clare Lombardelli and Alan Taylor. Currently, there is a 35% chance the market expects a 25 basis points rate cut this year. Lombardelli is hesitant about how further rate cuts could affect inflation.

Labour Market’s Loosening

She mentioned that the loosening of the labour market could be a return to normal conditions after a tight period, not necessarily a sign of weakness. Lombardelli voted to keep rates steady at the last meeting due to worries about high inflation and questioned whether there is slack in the economy. In contrast, Taylor believes it’s essential to maintain restrictive measures but not excessively. He cautioned that the bigger risk lies in lagging policy and keeping tight conditions in the short term, given the economy’s fragile state. The differing views within the Bank of England creates uncertainty, which is crucial for traders. With Lombardelli focused on stubborn inflation and Taylor concerned about economic weakness, the future of interest rates is uncertain. This divide indicates upcoming policy meetings will be contentious and heavily reliant on new data. Lombardelli’s concerns are backed by recent data from this summer. In July 2025, headline inflation held steady at 2.4%, while core inflation climbed to 3.6%, both exceeding the 2% target. Wage growth has recently cooled to 5.7%, which continues to raise worries about price pressures. On the other hand, Taylor’s caution reflects the wider economic situation in 2025. GDP was flat in the second quarter, and unemployment rose to 4.5% in July. This stagnant growth and softening job market support the idea that keeping rates high for too long could hurt the economy.

Anticipating Market Volatility

This disagreement suggests we should expect higher volatility in UK interest rate markets. The open conflict means that upcoming economic data could lead to sharper movements in short-term interest rate futures. Options like straddles on SONIA futures could be wise, allowing profit from significant rate shifts without betting on which way they’ll go. Paying attention to derivatives linked to the November and December policy meetings is important, as the market currently sees a low chance of a rate cut by year-end. If inflation or job data significantly diverges from expectations, we may see quick changes in these probabilities. Now could be a good time to buy volatility ahead of any potential data surprises. Historically, divisions within monetary policy committees lead to uncertain conditions. During similar periods of indecision in the late 2010s, implied volatility on short-term rates increased before key meetings. This indicates that any upcoming speeches from MPC members will be carefully watched for changes in tone. Create your live VT Markets account and start trading now.

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