BoE set to trim interest rate on Thursday after holding steady in September meeting
|- Investors expect the Bank of England to cut its policy rate by 25 bps.
- UK disinflationary pressure gathered further steam in September.
- The 200-day SMA near 1.2810 holds the downside in GBP/USD.
Market consensus points to further easing by the Bank of England's (BoE) upcoming interest rate decision on Thursday. The BoE has held rates steady at 5.00% in the previous gathering, but shifting investor sentiment now suggests a possible 25-basis-point cut this week.
No surprises are expected at the BoE meeting
At the bank’s September 19 meeting, policymakers stuck to quarterly rate cuts for now, with a November cut the most likely outcome. Regarding quantitative tightening, the committee voted unanimously to maintain the pace of reducing bond holdings by GBP 100 billion over the next 12 months, which again was in line with expectations.
The only dovish elements were the slight downgrades to Q3 GDP and Q4 CPI, though this is more a case of marking to market, which of course is subject to change depending on incoming data.
Looking ahead, indicators of inflation persistence—labour market tightness, private pay growth, and services CPI—should continue to guide policy.
Back to inflation, the headline Consumer Price Index (CPI) receded to 1.7% YoY in September, while the core CPI (which excludes food and energy costs) eased to 3.2% over the last twelve months, and Service inflation remained elevated at 4.9% from a year earlier.
Following the September BoE event, policymaker Catherine Mann expressed a cautious stance on the likelihood of multiple interest rate cuts in the coming months, emphasizing the importance of keeping policy restrictive.
However, early in October, Governor Andrew Bailey indicated that the Bank of England could take a "more activist" approach to rate cuts if there is continued positive news on inflation. Aligning behind Mann’s approach, Chief Economist Huw Pill stated that the British central bank should adopt a gradual approach when reducing interest rates.
Ahead of the BoE’s meeting, TD Securities analysts noted: “We anticipate a 7-2 majority to cut Bank Rate by 25bps and little change from September's guidance. Incoming growth and inflation data has been softer than the MPC expected in their August projection, but the budget will force some tweaks to the projection (but these will be less positive than markets expect). We do not expect any signal about December's policy decision.”
How will the BoE interest rate decision impact GBP/USD?
As inflation slowed in September, market participants appear to favour a rate cut at the BoE's monetary policy meeting on November 7 at 12:00 GMT.
FXStreet’s Senior Analyst, Pablo Piovano, notes that a rate cut could put further pressure on the British Pound, which could see additional downside if GBP/USD falls below its November low of 1.2833 (November 6). In that case, the next contention should emerge at the key 200-day SMA at 1.2811, prior to the July low of 1.2615.
“On the upside, bulls will be initially eyeing the provisional 55-day SMA at 1.3119. The breakout of that region could put a potential visit to the 2024 peak at 1.3434 (September 26) back into focus”, Pablo concludes.
Economic Indicator
BoE MPC Vote Rate Hike
Interest rates are set by the Bank of England’s (BoE) Monetary Policy Committee (MPC). The MPC sets an interest rate it judges will enable the BoE’s inflation target to be met. It is comprised of nine members – the Governor, the three Deputy Governors, the Bank's Chief Economist and four external members appointed directly by the Chancellor. Investors look at each member’s vote in order to seek cues over how unanimous was the decision on interest rates.
Read more.Next release: Thu Nov 07, 2024 12:00
Frequency: Irregular
Consensus: 0
Previous: 0
Source: Bank of England
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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