Another busy week for markets, with the US midterm elections taking centre stage before attention shifted back to interest rates and the Bank of England decision.

US midterms

The US midterm elections have created a changed political landscape in Washington and the prospect of greater constraints on the administration’s legislative agenda. For markets, the principal questions are now around fiscal policy, government spending and borrowing, regulation, and the extent to which political gridlock could limit further expansionary policy.

The initial market focus has been on what this could mean for US Treasury yields, the dollar and equities. However, as the immediate election reaction settles, inflation, economic data and the future path of Federal Reserve rates are likely to remain the more important drivers for markets.

UK: Bank of England raises rates to 4.00%

The Bank of England increased Bank Rate by 25bps from 3.75% to 4.00%, its first interest rate rise since August 2023. Eight of the nine Monetary Policy Committee members voted for a 25bps rise, while Catherine Mann voted for a 50bps rise to 4.25%. Nobody voted to hold or cut.

Inflation is the main concern. CPI was 3.5% in September, and the Bank now expects it to rise to around 5% by mid-2027, largely because of higher global energy prices associated with the Middle East conflict. Recent UK activity data have also surprised positively, giving the MPC more confidence that the economy can absorb tighter monetary policy.

Governor Andrew Bailey said the increase should not be viewed as the first in an “inevitable long sequence” of hikes, but indicated another rise could be justified if inflation risks do not ease.

Bank of England: Monetary policy (link to https://www.bankofengland.co.uk/monetary-policy)

What markets are pricing

The increase was already heavily reflected in market pricing ahead of the meeting, so the more interesting question is where rates are expected to go from here. Ahead of the decision, SONIA market pricing implied Bank Rate of around 4.0% by the end of 2026 and approximately 4.75% by the end of 2027, with year-end forward rates of around 4.13% for 2026 and 4.73% for 2027.

Put simply, the market is currently pricing further tightening rather than this increase being the end of the cycle.

What does this mean for deposit rates?

Bank deposit pricing does not simply move in line with Bank Rate. Banks typically price Fixed Term Deposits with reference to wholesale funding conditions, internal funding requirements and the relevant points on the interest rate and swap curves.

UK yield curve: current versus a year ago.

The shape of the current curve suggests that fixed-term GBP deposit rates could remain supported, particularly where banks have a requirement for term funding. Equally, because some future rate increases are already reflected in market curves, not every future Bank Rate increase should be expected to translate into an equivalent increase in deposit rates.

Two banks can value exactly the same 6 or 12-month deposit very differently depending on their respective funding requirements, which is why the relative pricing of different banks, and access to a choice of banks and tenors, matters.

Australia: RBA raises rates again

The Reserve Bank of Australia also raised rates last week, increasing its cash rate by 25bps to 4.85%, the fifth increase of 2026 and its highest level since 2008. The decision was split 6-3, with persistent inflation and higher energy prices continuing to concern policymakers.

Reserve Bank of Australia: Monetary policy (link to https://www.rba.gov.au/monetary-policy/)

Market signals: higher for longer

The message from markets remains relatively clear: interest rates may stay higher for longer, and in the UK the curve is currently pointing to further tightening beyond last week’s move.

For Flagstone International and our clients, that should continue to create opportunities across cash. The challenge is increasingly not simply finding a competitive headline rate, but giving clients access to the right bank, currency and tenor at the right point on the curve.

Key dates over the next fortnight

• 10 November: US CPI inflation

• 12 November: UK GDP

• 18 November: UK CPI inflation