Investing.com — are pricing in two Bank of England interest rate increases over the next 12 months as a second spike in energy prices pushes the central bank toward what UBS calls “adjustment hikes” rather than the rate cuts previously expected.
UBS strategists in a note dated Wednesday said decomposing gilt yields into rate expectations and risk premium shows the rate-expectations component of the curve, which strips out market uncertainty, points to two adjustment hikes before the BoE holds rates for some time.
That is about half the moves implied by forward rates once risk premia are included, the bank said.
The rate-expectations curve from six months onward has reached its highest levels since the end of February, UBS said.
Strategists highlighted a “hump” near the front end of the curve, the first time this pattern has appeared in their estimates since the conflict, reflecting expectations that the BoE will conduct a couple of hikes and then hold.
Governor Andrew Bailey referenced the same rate-expectations measure at the June and July Monetary Policy Committee meetings, pushing back on front-end curve steepness that UBS said was mostly explained by higher risk premia tied to inflation uncertainty rather than expected policy moves.
UBS said the European Central Bank’s September meeting and updated forecasts have lowered the bar for the BoE to hike in response to inflationary pressure, with the ECB’s hawkish messaging firming up UK rate expectations.
Nearly all of the year-to-date repricing of December 2026 BoE rate expectations can be explained by and year-end pricing for the ECB and the Federal Reserve, the bank said.
UBS economists expect the MPC to hold rates this week on the same 6-3 vote split as in July, with a more cautious tone reflecting the recent rise in energy prices.
They said the risk of the BoE delivering adjustment hikes is rising, largely for reputational and risk-management reasons.
Even in that scenario, UBS does not expect a new tightening cycle, saying any hikes would likely be followed by rate cuts that arrive sooner than markets are currently pricing.
UBS said its term-structure model estimates have historically forecast BoE policy rates more accurately than forward rates over horizons of at least 20 years, with performance improving at longer-dated tenors, citing methodology based on Adrian, Crump and Moench (2013).
The bank said growth resilience, as shown at the ECB’s September meeting, has shifted central bank focus from assessing inflation risk to responding to immediate inflationary pressure. Even when the BoE eventually cuts rates, markets expect only an easing toward neutral levels, UBS said.