The Bank of England (BoE) maintained its Bank Rate at 3.75% in a 6-3 vote, with dissenting members Pill, Greene, and Mann advocating for a hike. The tone was notably more hawkish compared to July, as inflation risks remain skewed to the upside. The BoE revised its Q3 GDP projection from 0.1% to 0.4% and now expects inflation to rise to 4% in Q1 2027. Governor Bailey highlighted that geopolitical energy risks and the ongoing conflict in the Middle East could necessitate further policy tightening if second-round inflation effects emerge. TD Securities suggests that a rate hike in November or December cannot be ruled out if oil prices remain elevated, and centrist members such as Bailey, Ramsden, and Lombardeli have not dismissed the possibility of further tightening [1].
Following the BoE's decision, the British Pound (GBP) experienced a knee-jerk weakness against the Euro (EUR), as markets were disappointed by the absence of a more hawkish signal. The market had nearly fully priced in a November rate hike, and the lack of a decisive shift in guidance or vote split was seen as a setback for GBP. TD Securities maintains a bullish EUR/GBP outlook, anticipating a breakout above 0.86 in the coming weeks, citing UK fiscal and political risk premiums and a less hawkish BoE stance compared to the European Central Bank (ECB). The GBP is expected to underperform against the EUR, especially in a global risk-off environment following the Fed's recent rate hike [4].
In the United States, the Federal Reserve (Fed) delivered a hawkish 25bps rate hike to a target range of 3.75%-4.00%, marking its first hike since July 2023. The decision was unanimous, and the Fed signaled that further tightening may be necessary to bring inflation back to target. The 2026 dot plot moved towards market pricing, indicating another 25bps hike by year-end. Real GDP growth projections for 2026 and 2027 were revised higher, and the unemployment rate was adjusted downward across the forecast horizon. PCE inflation is now forecast to reach the 2% target in 2029. Fed Chair Kevin Warsh emphasized that inflation remains too high and has not meaningfully improved, with many categories still posting increases above 3 percent on both 6- and 12-month bases. The US Dollar (USD) held gains post-Fed, with short-term yields rising and equities initially dropping, though S&P500 futures later firmed. BBH notes that global central bank tightening limits USD policy divergence, but US growth advantages keep USD risks skewed higher [2].
UOB's economics team interprets the September FOMC as the start of a short hiking extension, expecting two additional 25bps hikes in December 2026 and Q1 2027, followed by a prolonged hold for the rest of 2027. Persistent inflation, driven by energy prices, tariffs, and AI-related factors, could force further tightening. UOB rules out a back-to-back rate hike in October due to its proximity to the US mid-term elections [3].
According to [1], the BoE is prepared to act if second-round inflation effects emerge, while [4] reports that the GBP weakened due to disappointment over the BoE's guidance. Meanwhile, [2] and [3] both highlight the Fed's hawkish stance and the likelihood of further rate hikes, with [3] providing a more detailed forecast for future hikes.
CONCLUSION
Central banks are maintaining a hawkish stance as inflation risks persist, with both the BoE and Fed signaling the possibility of further rate hikes. The GBP weakened against the EUR following the BoE's cautious hold, reflecting market disappointment. The Fed's actions have bolstered the USD, and analysts expect additional tightening if inflation remains elevated.