Pound Sterling Rises After UK Inflation Hits 3.5%

The September CPI print compared with 3.1% in August and topped the 3.4% forecast, putting pressure on the BoE ahead of its Nov. 5 decision, where Bank Rate stands at 3.75%. Markets already see a November move as heavily priced, but the bigger question for sterling is whether the central bank follows with another hike in February or pauses after one or two precautionary increases.

That divide matters because it goes straight to the return investors can expect on UK assets. A longer tightening cycle would tend to support sterling by keeping UK yields relatively attractive, while a short, precautionary sequence would leave the currency with less policy backing into 2027.

Economists are split on how much of the inflation surge is sticky. Pantheon Macroeconomics sees policy rising in November and February and is close to adding a third hike, arguing that underlying services inflation accelerated to 3.9% in September from 3.7% and that headline inflation could stay above 4% for months. ING also expects hikes in November and February, but says the BoE may be confident enough by spring to begin cutting again by November 2027 if broader price pressures remain contained.

Lloyds Bank took a more cautious line, saying headline inflation is running about half a percentage point above the BoE’s July projection, but that core and services inflation are only modestly above forecast. It said the latest data argue for patience rather than a mechanical response, even as resilient activity keeps pressure on policymakers.

The near-term catalyst is the next BoE meeting on Nov. 5, followed by another CPI release on Nov. 18. If food prices and less volatile services start to firm, markets may push further out their expectations for cuts — and Sterling could extend its recent gains. If not, the pound may struggle to hold onto support once the November hike is in the price.