BoE set to keep interest rate unchanged after August inflation data shows lingering price pressures
- The Bank of England is set to hold its interest rate at 5.0% on Thursday.
- United Kingdom’s annual inflation was stable at 2.2% in August.
- BoE policy announcements are likely to rock the Pound Sterling.
After a close call in August, the Bank of England’s (BoE) September interest rate decision is keenly awaited for fresh cues on the bank’s future policy action and the pace of its bond sales.
Thursday’s meeting is not a “Super Thursday” – there won’t be any Monetary Policy Report (MPR) or a press conference from Governor Andrew Bailey –, but the United Kingdom (UK) central bank’s announcements at 11:00 GMT are likely to have a significant impact on the performance of the Pound Sterling (GBP).
What to expect from the Bank of England policy announcements?
The Bank of England is widely expected to hold the key interest rate at 5.0% following its September policy meeting, with the key focus likely on the language in the policy statement and the Monetary Policy Committee’s (MPC) voting composition.
The BoE is seen sticking to its cautious stance on the easing path amid elevated services inflation in the UK, as it awaits the Autumn Budget from the new Labour government on October 30. No new economic projections could also dissuade the central bank from committing to any forward guidance.
Back in August, the BoE lowered the key policy rate by 25 basis points (bps) to 5.0% from 5.25%, with a 5-4 MPC vote in favor of such a move. Chief Economist Huw Pill preferred to maintain the rate at 5.25%.
Jonathan Haskel, another MPC member, voted to keep rates on hold in August but he has since been replaced by Alan Taylor. Markets are uncertain about Taylor’s policy stance, anticipating him to go with the majority during his first rate-setting meeting.
August inflation data released on Wednesday showed that the Consumer Price Index (CPI) rose at an annual pace of 2.2%, staying above the BoE’s 2.0% target while coming in below the central bank’s expectations of 2.4% in the reported period. However, the rebound in the UK services inflation to 5.6% in August from July’s 5.2% remains a cause for concern, adding to the odds that the BoE will maintain its cautious outlook on the policy path.
Adding to this, Althea Spinozzi, Head of Fixed Income Strategy at Saxo Bank said, “while wage growth has surprised to the downside, with the 3-month average weekly earnings at 4% (down from 4.5%), it remains significantly higher than pre-pandemic levels. This is keeping real disposable income elevated compared to the 2010-2020 average, adding to the inflationary backdrop.”
Previewing the BoE policy decision, Althea noted: “The Bank of England is expected to keep rates steady in September, reflecting a cautious approach due to persistent inflation, especially in services, and elevated wage growth.”
“The BoE is likely to announce a further £100 billion reduction in gilt holdings in the next twelve months, reducing the need for active sales, which could provide fiscal relief for the government in light of the Autumn Statement,” she added.
How will the BoE interest rate decision impact GBP/USD?
The Pound Sterling has entered a consolidative phase against the US Dollar, having tested offers above the 1.3200 threshold earlier this week. Will the BoE policy verdict revive the GBP/USD uptrend?
If the BoE communication suggests the bank’s prudence on the future easing cycle, markets would perceive that as a hawkish hold, providing a fresh boost to the Pound Sterling. In such a case, GBP/USD could stretch higher toward the 1.3300 mark. Alternatively, should the central bank acknowledge the progress in the disinflationary trend and express concerns over the economic prospects, it could fan expectations for further rate cuts this year, dragging the pair back toward 1.3000.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for GBP/USD:
“The GBP/USD pair settled Wednesday above the falling trendline resistance on the daily chart at 1.3199, yielding a technical breakout. The 14-day Relative Strength Index (RSI) holds comfortably above the 50 level, currently near 60, suggesting that upside risks remain intact in the near term.
“Buyers, however, need to find a strong foothold above the 1.3250 psychological level to take on the upside. The next topside barriers are seen at the multi-year high of 1.3297 and 1.3350. Alternatively, acceptance below the 21-day Simple Moving Average (SMA) at 1.3153 is critical for a sustained correction. Further down, the July 17 high of 1.3045 will come to the rescue of the Pound Sterling should the downside extend. At that level, the 50-day SMA hangs around,” Dhwani adds.
British Pound PRICE This week
The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the strongest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.38% | -0.64% | 1.67% | 0.03% | -1.27% | -0.97% | 0.10% | |
| EUR | 0.38% | -0.32% | 2.02% | 0.37% | -0.95% | -0.65% | 0.43% | |
| GBP | 0.64% | 0.32% | 2.27% | 0.68% | -0.64% | -0.32% | 0.76% | |
| JPY | -1.67% | -2.02% | -2.27% | -1.62% | -2.85% | -2.59% | -1.63% | |
| CAD | -0.03% | -0.37% | -0.68% | 1.62% | -1.37% | -1.00% | -0.04% | |
| AUD | 1.27% | 0.95% | 0.64% | 2.85% | 1.37% | 0.31% | 1.39% | |
| NZD | 0.97% | 0.65% | 0.32% | 2.59% | 1.00% | -0.31% | 1.09% | |
| CHF | -0.10% | -0.43% | -0.76% | 1.63% | 0.04% | -1.39% | -1.09% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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