BoE Decision: Interest rate hold uncertain after seven straight hold announcements

• Odds for a rate cut by the Bank of England remain divided.
• UK disinflationary pressure stalled in June.  
• GBP/USD appears to be supported so far by 1.2800 region. 

Consensus among market participants appears pretty divided around the imminent interest rate decision by the Bank of England (BoE) arriving on Thursday. It is worth recalling that the central bank maintained its policy rate unchanged at 5.25% in the last seven meetings, although renewed repricing by investors seems to favour a potential 25 bps rate cut this week.

The BoE’s MPC vote is expected to be a close call 

The Bank of England's policy decision is expected to be a close call, while market pricing is now signalling a 63% probability for a quarter-point cut, and the Monetary Policy Committee (MPC) vote could come as close as 5-4 in favouring a reduction of the central bank’s rate.

Let’s remember that at the June gathering, the MPC decided to keep rates unchanged with a 7-2 vote. However, those who voted to hold rates indicated that their decision was “finely balanced," hinting at the idea that a rate cut could be in the offing.

Disinflationary pressure seems to have hit a wall in June after the headline Consumer Price Index (CPI) rose by 2.0% over the previous 12 months, matching May’s reading. The core CPI, which excludes food and energy costs, also matched the previous month’s prints, advancing by 3.5%.

In the same line, service inflation rose by 5.7% YoY from a year earlier and remains quite above the central bank’s 5.1% projection.

Still around inflation, the BoE’s Chief Economist, Huw Pill, argued that the bank was nearing a decision to cut interest rates, though service price inflation and wage growth remained troublingly high. It is worth noting that Pill joined the majority of his colleagues in June in voting to keep interest rates at 5.25%.

Her colleague Catherine Mann emphasized the strong price pressure in the UK economy, signalling that she is unlikely to support an interest rate cut in August. Mann added that the recent drop in domestic inflation was merely "touch and go" and predicted that inflation would likely exceed that rate for the remainder of the year.

Favouring a rate cut this week, Rabobank’s Senior Macro Strategist Stefan Koopman said, “We anticipate a 25bp cut to the Bank rate, bringing it to 5.00%, marking the start of a gradual easing cycle with 25bp cuts each quarter. However, there is a risk that officials may want to see another month of data first.”

Additionally, analysts at TD Securities argued, “We expect a 25bps cut at the August MPC meeting, with a narrow 5-4 vote. That said, uncertainty is high, not only due to sticky service inflation prints but also due to compositional changes on the committee. The message will likely be a cautious one, as the MPC should not want to signal consecutive cuts at this stage.”

How will the BoE interest rate decision impact GBP/USD?

Despite disinflationary pressures losing momentum in June, market participants seem to lean toward a rate cut at the BoE’s monetary policy meeting on August 1 at 11 GMT. 

FXStreet Senior Analyst Pablo Piovano sees the British Pound coming under renewed downside pressure in the event of a rate cut, as such a scenario is only partially supported by market forecasts.

Pablo adds that the GBP/USD rally experienced in the first half of July that lifted Cable to fresh 2024 peaks near 1.3050 was almost exclusively on the back of accelerated weakness in the US Dollar (USD) following investors’ repricing of a rate cut by the Federal Reserve (Fed) in September.

Against that backdrop, extra losses could motivate GBP/USD to break below the weekly low of 1.2806 (July 29) and challenge the provisional support at the 55-day and 100-day SMAs at 1.2776 and 1.2682, respectively. The breach of that region exposes a probable slide to the July low of 1.2615 (July 2), which appears reinforced by the proximity of the key 200-day SMA (1.2836).

On the upside, Pablo sees the initial stop for bulls at the 2024 peak of 1.3044 (July 17).