Deeper Bank of England Rate Cuts on the Horizon

Deeper Bank of England rate cuts on the horizon

18/2/2026

by Henry Cobbe CFA, Head of Research, Elston Consulting

In our 2026 Outlook, we noted that in December markets were pricing just one rate cut in 2026. We were concerned that giving the signals of slowing economic growth, the Bank of England Monetary Policy Committee may be obliged to do more, more quickly.

The chart below shows that at end Dec-25, markets were only pricing 1x 25bp rate cut from the BoE

A financial line chart titled 'UK BoE Market-Implied Policy Rates' comparing market expectations at three different time points: December 2024, September 2025, and the current 'Now' period in early 2026. The 'Now' line (dark blue) sits significantly lower than previous projections, showing an expected dip in rates toward 3.25% at the 1-year mark before a slight recovery.

With markets under-estimating the potential for rate cuts, in our view, we recommended the adviser firms we work with to consider two steps.

Whilst there is a structural story around structural Dollar weakness as part of the “debasement” trade and the so-called “Mar-a-Lago” accord, should BoE rates cut harder and faster than the Fed, the US policy rates would become relatively more attractive for that pair, leading to Sterling weakness vs USD.
With the prospect of more-than-expected rate cuts, it would make sense to extend duration within Bond portfolios to a more neutral posture to benefit from those cuts without venturing into longer-dated debt where affordability concerns remain.

Unemployment data

On Tuesday, UK economic data showed that unemployment reached 5.2% - its highest since the Covid pandemic and wage growth slowed pointing to weaker labour market.

The chart below shows the unemployment rate at 5.2% (ahead of 5.1% estimates) means it has reached a post-Covid high sending a concerning signal around economic growth. Source: Bloomberg.com

A line graph titled 'UK Unemployment Climbs to Pandemic Highs' showing the UK jobless rate from 2020 to early 2026. The orange line shows a sharp peak during Covid, a decline through 2022, and a steady climb starting in 2024, reaching a new high of 5.2% in 2026. Annotations mark the 'Covid' peak and the point where 'Payroll costs increase'.

The result of this weak data is that markets moved on Wednesday to price near certainty of two 25bp rate cuts in 2026, compared to 50% odds before the announcement.
The Bank of England MPC has itself been divided as to whether to hold rates steady (focus on inflation), or to cut rates (focus on employment and growth), with Governor Bailey casting the deciding vote.

A help for the Chancellor

Whilst the rising unemployment data is a concern for the Chancellor, the prospect of rate cuts, and hence downward pressure on Gilts yields also helps the Chancellor with additional borrowing leeway. Approximately every 25bp reduction in 10 year gilts yields creates an additional £1.5bn of fiscal headroom.

But slowing growth is a problem

Whilst lower gilts yields makes UK government debt payments less punishing, its root-causes – slowing growth is not a cause for celebration.
In the long-term, growth is the most effective way of reducing the level of government indebtedness (the Debt/GDP ratio).

Conclusion

As a result of the new data, we have seen gilt yields decline (so longer-dated bond values increase) and Sterling weaken relative to the Dollar.
With the pressure both on debt affordability and slowing economic growth, we shall continue to monitor the UK macroeconomic factors.

Asset Allocation Research for UK Advisers