The Bank of England’s Decision Maker Panel survey indicated UK firms’ inflation expectations for one year ahead increased to 3.5% in the quarter ending September. Three-month average expectations rose to 3.4%, the highest since February 2024, while three-year expectations remained stable at 2.9%.
Realised annual own-price growth for UK firms rose slightly to 3.8% in September, a 0.1% increase from August. Firms anticipate their own-price inflation to remain at 3.7% for the year ahead, stable since July, with employment expectations unchanged at 0.0% for the three months to September.
Impact On The Currency
At the time of the report, GBP/USD experienced a 0.18% increase, trading around 1.3500. Inflation measures the price rise of a goods and services basket, usually expressed as a percentage change month-on-month or year-on-year. The Consumer Price Index (CPI) tracks these changes and is closely monitored by central banks.
High inflation typically elevates a country’s currency value, as central banks adjust interest rates to counteract inflation, affecting foreign exchange and gold prices. Gold’s allure diminishes with higher interest rates due to increased opportunity costs compared to interest-bearing assets. Lower inflation provides an investment alternative benefit for gold.
We are seeing that UK firms now expect inflation to be higher at 3.5% over the next year, which is a sign that price pressures are not fading as hoped. This data is important because it is watched very closely by the Bank of England when they decide on interest rates. This expectation is a slight increase and shows that businesses are still planning for higher costs.
This survey reinforces what we have already seen in official data, as the Office for NationalStatistics reported last month that August 2025’s headline CPI was 3.1%, still significantly above the 2% target. The fact that companies plan to increase their own prices by 3.7% in the year ahead suggests this inflation is becoming embedded. This puts the Monetary Policy Committee in a very challenging position.
Interest Rates And Market Strategy
Given this stickiness, we believe the chances of an interest rate cut from the Bank of England before the end of the year are fading. We remember the period of 2022-2023 when inflation became difficult to control, and the central bank will want to avoid that scenario at all costs. They will likely lean towards keeping interest rates at their current level for longer.
For us in the derivatives market, this points toward a stronger British pound. We could look at call options on GBP/USD, positioning for a move above the 1.3500 level it is currently testing. A hawkish central bank typically supports its currency, and the market appears to be pricing this in.
We should also expect more movement in the UK government bond, or gilt, market. The prospect of higher rates for longer could keep yields on 2-year gilts, which are currently near 4.8%, from falling. Traders might use interest rate futures to position for yields remaining elevated through the final quarter of 2025.
The one piece of data to watch closely is the flat expectation for employment growth. If the broader UK labour market starts showing significant weakness, the Bank of England could be forced to change its course despite inflation. This is the main risk to a strategy based on a stronger pound and higher interest rates.
