Commerzbank's Volkmar Baur highlights the UK economy's resilient performance, citing upward revisions to GDP and robust monthly data as key factors supporting further monetary tightening by the Bank of England (BoE) [1]. The first quarter saw 0.6% quarter-on-quarter growth, while second-quarter GDP was revised up to 0.5%. Additionally, July's monthly GDP data showed a 0.4% month-on-month increase, indicating a solid start to the third quarter [1].
With core inflation remaining sticky at 2.6%, Baur now expects the BoE to hike rates in November and again in February, bringing the Bank Rate to 4.25% [1]. The market is currently pricing in two additional rate hikes by February, aligning with Commerzbank's revised forecast and suggesting limited immediate market impact [1].
Previously, Commerzbank anticipated sterling would weaken towards year-end, but now expects EUR/GBP to trade broadly sideways in the coming months. However, from the second quarter of next year, sterling is expected to come under renewed pressure against the euro as additional tightening expectations are gradually priced out following the February meeting [1].
The market currently prices in two further rate hikes beyond Commerzbank's expectations, implying four hikes in total. Commerzbank believes these extra tightening expectations will be unwound after February, which could weigh on sterling [1].
CONCLUSION
Commerzbank's revised outlook anticipates two more BoE rate hikes due to resilient UK growth and persistent inflation, with limited immediate impact on sterling. However, sterling may face renewed pressure against the euro later in 2027 as market expectations for further tightening are gradually priced out.