UK swap rates show market bets on two BOE rate cuts this year

CEIC recently added daily yield curve datasets for UK gilts and overnight index swap (OIS) rates. The OIS is based on sterling overnight interest rates (SONIA) -- the successor to Libor, the interbank offer rate measure that was discontinued in 2021.

OIS contracts can be seen as the market's wagers on the future of interest rates. For the UK, the curve is pricing in two 25-basis-point cuts in the remainder of 2025. (This could provide some leeway for embattled Chancellor of the Exchequer Rachel Reeves after recent government borrowing figures overshot expectations, hurt by higher-than-expected interest payments.)

The Bank of England held its key rate at 4.25% at its June meeting. The Monetary Policy Committee next meets on Aug. 7; the OIS rates a month from now predict a cut to 4%. The slope of the curve shows the next two cuts are currently expected near the end of this year and in mid-2026.

These swap-market expectations have been little changed even amid sticky UK consumer prices. Recently released figures for June showed core inflation edged up to 3.7%, while headline inflation stood at 3.6%, its highest for over a year.

 Tapping the gilt yield datasets, which include nominal and real interest rates, we also look at the implied inflation rates we can derive. CEIC users may estimate medium-term inflation (measured as derived inflation from 3-year nominal and real gilts) and long-term inflation (based on 40-year gilts), using the Fischer equation (i.e.: nominal rates being a summation of real interest rates and implied inflation; a decomposition is available in our final chart, which also shows current core inflation just above implied medium-term inflation).

Click here for our dashboard covering inflation dynamics across other major economies.