The Bank of England is likely to keep its interest rate at 4% on September 18, based on a Reuters survey of 67 economists. While many expect a quarter-point cut in late 2023 or early 2024, more experts think the Bank might hold off on further cuts in 2025. Inflation is rising and is predicted to reach 4% in September. The goal of getting inflation back to 2% won’t happen until around mid-2027. Every economist surveyed agrees on keeping the rate steady this September, with 42 anticipating a cut later in the year. Key inflation and job data set to be released on September 16-17 will play a crucial role in the Bank’s November decisions.

Wage Growth and Inflation Trends

Wage growth remains strong at 5%. Inflation is expected to average 3.8% this quarter and 3.6% in the next. Some economists warn that ongoing inflation makes cutting rates risky, suggesting that expectations may drift. The UK economy is anticipated to grow modestly, by 0.2–0.4% each quarter through 2026, with annual growth staying just above 1%. The Bank of England is also working to shrink its balance sheet, with plans to reduce bond holdings by £50–100 billion in the coming year. This Thursday, the Bank of England is expected to keep the rate at 4%. This pause is important because it comes after several reductions from the peak of 5.25% in 2023. The real concern now is not just this week’s meeting but how to prepare for the uncertain outlook for November and beyond. Inflation remains a central issue, with predictions showing it will reach 4% this month. We saw a similar pattern in spring 2024 when inflation briefly hit the 2% target, only to rise again. This history supports the Bank’s current cautious stance. With high wage growth at 5%, nearly one-third of analysts believe that rate cuts for this year are over. Due to all this uncertainty, we can expect increased market volatility leading up to the November meeting. Key data points to monitor are the inflation and labor market numbers coming out tomorrow and Wednesday. Any surprises in this data could lead to significant changes in short-sterling or SONIA futures for the fourth quarter.

Opportunities in Currency Derivatives

There are potential opportunities in currency derivatives, especially for the British Pound. If the Bank’s statement this week expresses more concern about inflation than economic growth, the GBP could strengthen, making call options appealing. However, if there are hints that a rate cut in November is still likely, the pound might weaken, benefiting those holding puts on GBP/USD. All of this is occurring against the backdrop of a weak economy, only expected to grow around 0.3% each quarter. The Bank is also continuing to cut its bond holdings, creating a form of tighter policy that conflicts with the need for lower rates. This sets up a challenging situation where combating inflation clashes with the need to support slow economic growth. Create your live VT Markets account and start trading now.

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