British Pound: Fragile labour market clouds BoE hikes - Commerzbank

Commerzbank’s Michael Pfister argues that rising Oil prices have sharply lifted UK rate expectations, with markets now discounting four Bank of England hikes by mid-2027 versus just over one in June. However, he highlights the UK’s weak labour market and growth risks from upcoming budget talks, questioning whether such tightening is realistic and seeing this as a negative backdrop for the Pound.

UK tightening doubts weigh on Pound

"The oil price risen significantly again in recent weeks, with the 110 USD per barrel mark being targeted following the Houthis’ advance in Yemen. The close link between the oil price and interest rate expectations in the current environment was highlighted in our numerous analyses from the spring, and these analyses have consequently regained significance."

"The Bank of England is no exception. Here, too, interest rate expectations have shifted significantly towards rate rises. While at the end of June the market had priced in just over one rate hike by the middle of next year, the figure now stands at four."

"Policymakers are nevertheless unlikely to find a shift in interest rate policy an easy decision. This is because, even though the growth figures are very robust, the labour market remains in a serious crisis."

"The Bank of England must therefore consider very carefully whether to raise interest rates in such an environment. In the coming weeks, discussions about the forthcoming budget are also likely to gather pace."

"We therefore remain sceptical as to whether interest rate rises on the scale currently anticipated by the market are realistic. Those banking on interest rate rises might be better off, unusually, turning their attention to other markets - this is not a particularly good sign for the pound."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)