Liquidity lowdown: Are cash markets becoming too hawkish again?

UK cash markets are pricing an excessively hawkish path for Bank of England rates, creating opportunities to add selective duration.

• Markets are pricing as many as four UK interest-rate hikes over the next 12 months, a significant increase since the start of August 2026.
• Delivering four hikes would require persistent inflation, renewed underlying price pressures, stubborn wage growth and domestic demand stronger than many forecasts anticipate.
• The economy would also need to keep growing despite higher borrowing costs, with robust consumer spending, continued business investment and low unemployment; the author considers this possible but unlikely.
• Cash remains attractive as a strategic asset class because elevated yields, attractive risk-adjusted returns and macroeconomic uncertainty are supporting demand.
• Longer-dated money-market and short-term fixed-income yields may now compensate investors for rate risks that may not materialise, provided liquidity and credit risks remain disciplined.

Takeaway: Investors should consider selectively extending duration in money-market strategies to lock in attractive income, while recognising that market pricing reflects probabilities rather than a forecast and could become even more hawkish if the economy proves unexpectedly strong.