Market prices indicate that investors do not expect a quarter-point interest rate hike by the Bank of England (BoE) until the February 2027 meeting of the Monetary Policy Committee (MPC). Most economists polled regularly by Reuters have long expected the BoE to keep Bank Rate unchanged at 3.75% this year, but financial markets have generally expected an increase – a difference which BoE Governor, Andrew Bailey, said reflected markets’ pricing-in the risk of an intensification of the U.S.-Iran war. Even though UK inflation is forecast to remain above 2.0% until late next year, a narrow majority of economists in the latest Reuter’s poll expect at least one cut in Bank Rate by the middle of 2027. UK economic growth is expected to average 1.1% and 1.2% in 2026 and 2027 respectively, before accelerating to 1.5% in 2028, according to the survey.
Officials at the UK Treasury are looking at possibly raising billions of pounds in extra borrowing by using flexibility within the UK Government’s fiscal rules, according to the Chancellor, John Healey. Mr Healey said the funding could be spent on infrastructure, housing and help for business. Former Chancellor, Rachel Reeves, had changed the UK’s fiscal rules in 2024 to take account of public sector assets when considering the UK Government’s debt levels, offering the possibility of more public borrowing for investment. Extra borrowing could be channelled through public agencies such as the British Business Bank, the National Wealth Fund and the National Housing Bank.
UK banks are increasingly pledging higher-risk assets – such as loans linked to high-interest store cards and vehicle leases – as collateral at the Bank of England (BoE), a Reuters review of BoE filings has shown. In mid-August, banks pledged £1.9 billion worth of the BoE’s highest-risk type of collateral at its weekly auction for six-month funds which was the most since March 2020 and three times as much as in the previous week. In total, Reuters calculations show that the BoE had about £17.8 billion of what it calls “Level C” collateral on its books from its Indexed Long-Term Repo (ILTR) facility, up from £8.7 billion a year ago and under £1.0 billion in mid-2024. A BoE spokesperson said the ILTR was designed to allow firms to use a broad range of assets as collateral while allowing the BoE to protect itself through what it described as robust risk management.
The UK Government plans to give the Bank of England (BoE) a new secondary objective to support innovation in payment systems and digital money such as stablecoins while maintaining financial stability as the central bank’s primary responsibility. Stablecoins are crypto tokens designed to hold a steady value and are predominantly used in crypto trading as well as, increasingly, in payments. The UK Government believes that developments in digital payments technology, including tokenization, has the potential to transform financial markets although financial stability will always remain the central bank’s primary objective. However, the Bank for International Settlements (BIS) has said that stablecoins do not credibly function as a means of payment at scale and tokenized deposits offer a more compelling case to harness the benefits of this new technology.
During the month Moody’s raised the outlook for Bank of Ireland to “Positive” as part of a general rating action on the Irish banking sector following the recent upgrade of the sovereign rating that was driven by sustained improvements in economic and fiscal strength as well as strong underlying economic growth – supported by public investment under the National Development Plan (NDP) – which will help to ease long-standing domestic constraints. In addition, Moody’s also reaffirmed the long-term credit ratings of Investec Bank plc and raised the outlook for the Bank to “Positive” to reflect the resilience of its asset quality and profitability to macro-economic events and interest rate shocks in recent years. Meanwhile S&P raised the outlook for Danske Bank A/S to “Positive” as part of a general rating action to reflect improvements in Danish banking regulations and supervision which combined with the Danish central bank’s proven funding model, strong economy, and sovereign strength will help to preserve financial stability in the Danish banking system through business and economic cycles. In addition, Fitch upgraded the long-term issuer rating of Metro Bank plc while maintaining the “Positive” outlook to reflect progress in executing the Group’s transformation strategy which is strengthening its business profile and improving its financial performance resulting in higher operating profit from strong volume growth in higher-margin specialist lending segments as well as substantial cost savings.