Morgan Stanley has changed its prediction about the Bank of England (BOE) rate cuts. They now expect no cuts for the rest of the year. Earlier, Morgan Stanley thought cuts might happen in both November and December, but now they see cuts beginning in November 2025, aiming for a final rate of 2.75%. UBS Global Wealth Management and Peel Hunt have also updated their forecasts, expecting no BOE rate cuts this year. On the other hand, BNP Paribas has pushed its expected rate cut from November to December.

Repricing the Rate Environment

The outlook for UK interest rates has changed dramatically after the Bank of England’s recent decision. Major banks are now calling off expected rate cuts in November and December. This means the market must adjust to a situation where rates stay high for a longer time, likely into 2025. This shift in thinking is backed by recent data. The Consumer Price Index (CPI) for August 2025 was surprisingly high at 3.1%, and wage growth remains high at 4.5%. These numbers make it hard for the Monetary Policy Committee to justify a rate cut anytime soon. In the derivatives market, this suggests we should prepare for higher short-term rates. We might want to rethink positions that gain from falling rates, like receiving fixed on SONIA swaps. The main strategy now is to pay fixed on swaps set for early 2026 or buy calls on short-term interest rate futures. We anticipate this will put downward pressure on short-dated UK government bonds, causing yields to rise. Shorting two-year Gilt futures could be a smart way to take advantage of this change in the coming weeks. In just the last 24 hours, the yield on the 2-year Gilt has risen 15 basis points to 4.25%, and we believe it has room to go higher.

British Pound Outlook

The British Pound should get support from these new rate expectations. We might see GBP/USD reaching the 1.30 level as the interest rate gap with the US dollar narrows. A good strategy could be buying sterling call options, which offer a way to benefit from potential currency gains with limited risk. This situation feels similar to what we saw in 2023 and 2024, when persistent inflation caused the BOE to disappoint markets expecting early cuts. That experience taught us that the last part of disinflation is often the toughest. The market appears to be relearning that lesson now. Create your live VT Markets account and start trading now.

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