Bank of England Signals Prolonged High Rates, Impacting Market Expectations

The Bank of England has shifted its tone dramatically, signaling that interest rates are likely to remain elevated well into 2026. Deputy Governor Lombardelli and Governor Andrew Bailey emphasized limited room for further cuts without reigniting inflation, dashing hopes for rapid monetary easing. Financial markets have adjusted to this new reality, with Bailey asserting his message has 'landed.'

August's narrow 5-4 vote to cut rates to 4.0% now appears an outlier rather than a trend. Recent upside inflation surprises, particularly in sticky sectors like food and energy, have forced policymakers to recalibrate. The central bank finds itself trapped between slowing growth and persistent price pressures that remain above target.

Market expectations have undergone a seismic adjustment. Where traders once anticipated quarterly cuts, they now face the prospect of rates plateauing for years. This hawkish pivot creates a challenging environment for risk assets, though cryptocurrencies may benefit from prolonged liquidity constraints.