UK inflation accelerates to 3.5% in September, boosting BoE hike odds
Annual UK consumer price growth climbed to 3.5% in September from 3.1% in August, beating forecasts and reinforcing market expectations that the Bank of England will tighten policy next month, lifting sterling.
According to MUFG’s Lee Hardman, the inflation data, paired with recent resilience in UK activity and jobs figures, gives the Bank of England (BoE) sufficient grounds to lift borrowing costs in November. He added that recent remarks from BoE policymakers, including Governor Andrew Bailey, had already signalled this direction.
Hardman projects that price growth will continue rising, potentially surpassing 4.0% in 2026, once the household energy price cap is adjusted upward again. He described the current mix of economic indicators as supportive of continued short-term gains for sterling.
Separately, Brown Brothers Harriman analyst Elias Haddad said a quarter-point BoE rate increase to 4.00% on November 5 now looks all but certain following the CPI print. He noted that the headline reading topped both the 3.4% consensus forecast and the central bank’s own 3.0% projection, while services inflation also beat expectations, climbing to 3.7% year-on-year.
Haddad further observed that swap markets continue to price in 113 basis points of BoE tightening over the coming year, a level he considers overstated given that the UK economy remains below full capacity, real wage gains are minimal, the policy rate already sits near the upper end of the central bank’s estimated neutral band, and fiscal policy is likely to tighten following the October 28 budget announcement. He noted that Governor Bailey was scheduled to speak publicly later that day, offering an opportunity to respond to the inflation surprise.
Sterling gained against both the US dollar and the euro in the wake of the release.
Why it matters: The stronger-than-forecast UK CPI September reading bolsters the case for the BoE to raise rates soon, a dynamic that typically lifts GBP/USD and GBP/EUR via widening interest-rate expectations, while also influencing UK gilt yields.
Sources: FXStreet; FXStreet; Investing.com (forex)