UK September CPI Beats Expectations, Boosting Rate Hike Bets as GBP/EUR Hits 17-Month High
nashnova research
UK September CPI rose to 3.5% year-on-year, beating forecasts and hitting an 11-month high driven by energy prices; markets now almost fully price a November hike, and sterling reached a 17-month high against the euro.
How much did inflation actually rise — and why the overshoot?
September headline CPI came in at 3.5% YoY, up from 3.1% in August and above the consensus forecast of 3.4%.
Core CPI rose to 2.8%; services inflation climbed to 3.7% — both above expectations.
This means → the headline beat looks energy-driven on the surface, but core and services inflation both overshooting signals that domestic price pressure is building too, not just fuel costs.
In plain terms = the Iran-war oil-price spike lit the fuse, but the UK's own inflation engine is also accelerating.
Why did sterling rally immediately?
Sterling rose 0.1% against the dollar to $1.339, holding near a one-month high.
Against the euro it gained 0.2%, rising for a fifth straight session to 83.80 pence — a 17-month high.
Month-to-date, the pound is up nearly 2% vs the euro, on track for its best monthly performance since May 2023.
This means → the market logic is straightforward: inflation beats → higher odds of a rate hike → rising rate expectations → stronger pound.
Is a November rate hike a done deal?
Money markets now almost fully price a 25-basis-point hike by the Bank of England in November — the first increase since 2023.
LSEG data shows traders expect four cumulative hikes by mid-next year.
Pantheon Macroeconomics economists wrote: a November hike is locked in, a second in February is expected, and a third "very close to" landing by May or earlier.
Tuesday's jobs data added fuel — wage growth ticked up again and the labour market showed early signs of recovery, reinforcing the hike case.
What is the fight inside the MPC about?
Last month the Bank held rates at 3.75%, but the vote split 6–3 — Governor Bailey led six members to hold, while Mann, Greene, and Pill voted for a 25 bp hike.
Bailey's position: no clear second-round effects yet (inflation feeding from energy into wages and then into broader prices), but he conceded it is "increasingly difficult to avoid" a hike.
The core hawk–dove divide: Mann argues the labour market is "static, not loose" and warns upcoming pay negotiations will push inflation higher; Greene said outright that "second-round risks are greater than we assumed."
This reflects a dispute not over direction but over pace — not whether to hike, but how fast and how far.
What is happening on the euro side that amplifies sterling's strength?
The euro has weakened against most currencies recently; France faces mass anti-government protests and a deteriorating fiscal outlook.
French 10-year borrowing costs have been pushed to a 24-year high.
In plain terms = sterling's rally is not all its own doing — the euro is being dragged down by France's political and fiscal turmoil, flattering the pound by contrast.
What should markets watch next?
Next week Chancellor John Healey unveils his first budget, which he says will include measures to bolster the economy's resilience to the Iran-war energy-price shock.
Deutsche Bank poses the key question: can this "low-key budget" maintain credibility ahead of larger spending, tax, and borrowing decisions next year?
This means → sterling's trajectory hinges on two variables: whether inflation falls back quickly once the energy shock fades, and whether the budget's fiscal scale forces the Bank into a longer tightening cycle.
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