Potential for BoE to cut rates in 2026 increases following inflation data
Hal Cook, senior investment analyst, Hargreaves Lansdown: “Today’s inflation print was universally lower than expected: the main CPI rate of 3.8% was lower than the expected 4%, core inflation fell to 3.5% and services inflation held steady at 4.7%, below an expected figure of 5%. This has added to a view already popular with investors in recent weeks that the Bank of England might end up cutting interest rates more than previously expected over the next 12 months or so. As a result, investors demand for UK government bonds (gilts) has remained strong, causing yields to fall further.
The inflation data comes on top of UK unemployment creeping up over recent months, hitting 4.8% in August (the latest data available).
The yield on the 10-year gilts has fallen to around 4.42% today (their lowest level since December 2024), having been as high as 4.75% as recently as 9 October, reflecting investors expectations of rate cuts increasing. Swaps markets are now pricing in a 60% probability of a rate cut ahead of year end, up from 40% yesterday. The Monetary Policy Committee next meet on 6 November to discuss interest rates.
We think the market has overreacted this morning: inflation at 3.8% is still nearly double the Bank of England target and Andrew Bailey has been clear that future rate cuts will be made in a considered fashion and data driven. He hasn’t appeared to be in a rush to cut so far.
There is also a risk that the upcoming Budget towards the end of November could change things. It’s therefore unclear whether the Bank of England will look to cut at their next meeting or wait to see what comes out of the Budget before cutting further – remember that they have already cut rates three times in 2025, taking them from 4.75% at the start of the year to 4% today. While a cut in November is more likely after this latest inflation data, it’s by no means guaranteed.”