26 October 2026: 4.75% is expected to be the ‘top’ for the base rate

City economists polled by Reuters believe the Bank of England will raise interest rates over the next six or seven months to curb inflation, but doubt the base rate will rise above 4.75%.

Market-implied expectations suggest the Bank of England will raise rates at least four times over the next year, taking the base rate from 3.75% to 4.75% by the end of July, with some pricing even pointing to 5% by December 2027.

The report says the outlook looks too aggressive. James Smith, a developed markets economist at ING, says few forecasters agree with a path that implies multiple hikes followed by no later cuts. He argues the Bank could give the all-clear by next spring and potentially cut rates again by the end of next year.

Meanwhile, Sanjay Raja, Deutsche Bank's chief UK economist, says current market pricing overstates the likely path for rates. He says much of the expected tightening reflects risk premia rather than a pure policy outlook. He estimates that, once that is stripped out, only about 50 basis points of increases are effectively pencilled in.

Deutsche Bank’s base case is for the Bank of England to lift the bank rate to 4.25% by next February and then hold it there through the end of 2027. Oxford Economics similarly expects 25-basis-point increases at the November and February meetings, also taking rates to 4.25%, below current money market expectations.

This week's Budget will provide more than £1bn for social and affordable housing in England, taking funding for the government's 10-year homes programme past £40bn.

Mayors and regional leaders across England are also expected to receive greater powers and funding in Wednesday's announcement, with councils able to borrow from the government to invest in house-building at preferential interest rates.

The plans are hoped to give regional leaders more flexibility and authority over investment decisions.

Chancellor John Healey said English cities and regions would get the "right to decide their own future", while Prime Minister Andy Burnham said the plans were about shifting power to those "who know their communities best".

The Chancellor will also announce more support for small breweries, with the Treasury saying he wants "to turn the tide for our pint producers".

The October survey data for the United Kingdom indicated a pickup in private-sector activity. The S&P Global Flash Purchasing Managers' Index releases showed both manufacturing and services gaining traction from September and beating consensus forecasts.

The Manufacturing PMI climbed to 52.8 from 51.9, defying expectations for a modest pullback to 51.8. Services activity also strengthened, with the Services PMI rising one full point to 53.1, well above projections of a decline to 51.8.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, affirmed that “the promising economic picture from the latest PMIs should provide an encouraging base for further robust economic growth through the winter months, barring any adverse surprises to businesses in the tax and spending review.”

Retail sales fell 0.4% as cautious consumers cut back, raising fresh concerns for retailers heading into the crucial Christmas shopping period.

The decline was sharper than expected. Susannah Streeter, Chief Investment Strategist at Wealth Club, warned that squeezed household budgets and rising energy costs were compounding an already difficult economic backdrop.

Meanwhile, Brent crude oil climbed to $114 a barrel, its highest level since May, amid further escalation of tensions in the Middle East and growing concerns about global energy supplies.

Streeter said markets were ending a volatile week in a guarded mood, with technology shares under pressure and investors increasingly concerned about the inflationary impact of rising oil and freight costs.

Sterling enjoyed a generally constructive week, recovering further from the sharp sell-off earlier in October. The pound strengthened against the US dollar on four of the five trading days and finished the week modestly higher overall.

The Federal Reserve and its peers in the Eurozone and Japan will likely keep interest rates unchanged next week, opting to bide their time before further hikes.

Three days of decisions starting from Wednesday in Washington are likely to affirm a hawkish stance, albeit at a measured pace, as policymakers confront inflation risks ranging from surging energy prices to the artificial intelligence boom.

The Fed raised rates in September for the first time since 2023, and the FOMC signalled another increase was likely in 2026. Since then, US inflation data has been strong, but officials seem in no rush to hike rates again. Instead, economists and investors expect a move at the final meeting of 2026, in December.

Fed Chairman Kevin Warsh has avoided giving guidance on future moves and will face a tricky test at his post-meeting press conference. He probably will not offer much insight into December, but he may also not want to sway market bets away from the current expectation of a hike.

Fed watchers may need to wait until after the meeting to hear what other FOMC members say about policy prospects.

The European Central Bank could offer its own signals on a December hike on Thursday, in a decision overshadowed by France’s bond-market troubles. The following day, the Bank of Japan (BOJ) will likely keep rates steady while leaving the door open to a year-end move.

Economic pessimism is deepening among American voters, but President Trump is offering a different sales pitch.

Days before the midterm elections, which will serve as a referendum on the US president’s policies, he declared buoyantly: “We have the single greatest moment in the history of our country in terms of the economy.”

The numbers tell a more complex story. So do the polls, which show voters intend to punish Republicans for broken promises and a cost-of-living crisis that the majority of Americans blame on the Iran war.

Broadly speaking, the American economy is doing well. Its growth is outpacing leading G7 economies, GDP is strong, unemployment is low, and industrial output has reached a post-pandemic high.

Yet the issue American voters care most about, inflation, remains stubbornly high.

When Trump returned to the White House in January 2025, he inherited an economy on the mend and promised lower prices.

Under the Biden administration, US inflation peaked at 9.1 percent in June 2022, the highest in 40 years, driven by pandemic-related disruptions and the war in Ukraine.

By the time Biden left office in 2025, inflation had broadly stabilised, with rates below 3 percent. Global crude oil markets had also steadied after the 2022 shocks.

In the first 13 months of Trump’s second term, growth rose, and optimism prevailed. Inflation remained at or below 3 percent throughout 2025. By February this year, it had fallen to 2.4 percent. Nonetheless, price increases have remained above the Fed’s 2% target for a considerable time.

Private-sector business activity continued to expand in October, according to preliminary data S&P Global released on Friday.

The S&P Global Manufacturing Purchasing Managers' Index rose to 56 in October, a 53-month high, up from 55.9 in September and in line with market expectations of 55.6. Meanwhile, the Services PMI was in line with forecasts at 57.9, down from 58.8 in September.

The Composite PMI, which combines manufacturing and services activity, eased to 57.6 in October, down from 58.4 in the previous month.

Following the release, Chris Williamson again argued: "October’s flash PMI data indicate that the US economy continues to boom at the start of the fourth quarter. The output readings from the survey are consistent with GDP growing at a 5% annualised rate after a 4% expansion was signalled for the third quarter."

The U.S. dollar weakened modestly over the week, reversing some of the gains it had made earlier in October. The clearest evidence came from GBP/USD, with Sterling rising from around 1.3310 at the start of the week to about 1.3380 by Friday's close, suggesting a weaker dollar overall.

Donald Trump labelled the previous Fed Chair, Jerome Powell, ‘Too-Late Powell’, a reference to the President's view that Powell kept interest rates ‘too high for too long’.

If he were in one of the Palaces in Paris, Frankfurt, Rome, or Madrid, he would be close to apoplectic over the ECB's performance, which, since its creation in 1998, has built a reputation for responding slowly to economic conditions or dithering when decisive action is warranted.

During the financial crises of 2008 and 2012, the ECB stayed on the sidelines too long, while during the COVID pandemic it reacted too slowly to both the initial outbreaks and the inflationary effects of the support it gave the economy afterwards.

It is therefore no surprise that the Eurogroup has asked for more time to consider applications for the post Isobel Schnabel is about to vacate, even though her term's end was well known for several years.

The ECB is behaving in its classic consensus-driven way, as there is no immediate agreement on the preferred candidate.

The Group still has to consider Christine Lagarde’s departure, which may be announced at any time.

Germany is securing additional gas supplies for winter amid significantly lower storage levels, with contracts worth nearly €245 million ($274 million) awarded to ensure sufficient reserves are kept on standby, Trading Hub Europe said on Friday. THE, the operator responsible for organising the German gas market, said special tenders to safeguard supply for February and March 2027 alone cost about €107 million. That is in addition to the approximately €137 million for the standard tenders through which THE secures gas supplies each year to address potential grid bottlenecks.

These contracts serve as insurance if additional gas is needed. They are meant to incentivise participating companies to keep gas in storage longer and potentially store additional volumes.

As of October 21, German gas storage facilities were only 61.1% full, compared with 75.4% at the same time last year.

Low economic growth and social unrest have fuelled fears that France's debt crisis could spread across the Eurozone, reports say.

Over half a million protesters took to the streets in France this weekend, including more than 100k in the capital, Paris, Bloomberg reported, citing data from the country's Interior Ministry.

According to French media polls, 59% of the 1,500 adults interviewed want the demonstrations to end quickly, up 6 points from last week, as worries about the economic and social fallout mount.

The unrest has heightened fears about public finances. This comes as France dodged a downgrade by Moody’s Ratings late Friday, even as it struggles to reduce the budget deficit ahead of the 2027 election.

The spread between 10-year yields in France and Germany, a closely watched gauge of bond risk, rose to levels last seen during the Eurozone debt crisis. German bonds are the region’s safe asset, and the spread to French debt reached 178 basis points on Thursday, up from 85 basis points at the start of September.

Private-sector economic activity also shrank this month, with the Composite Purchasing Managers’ Index (PMI) compiled by S&P Global dropping to 48.4 in October from 51.1 last month, the report added. It noted that this is below the 50 threshold separating expansion from contraction.

The Euro had a moderately positive week in global FX markets, benefiting from a broader pullback in the U.S. dollar and improved investor sentiment, despite escalating unrest in France. Like Sterling, the single currency gained ground through the middle of the week before surrendering a small portion of those gains on Friday.

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