Breaking: BoE leaves interest rate unchanged at 5% as expected

The Bank of England (BoE) announced on Thursday that it left the policy rate unchanged at 5% following the September policy meeting, as expected.

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In its policy statement, the BoE announced that it will reduce the stock of gilts by 100 billion GBP in the year of October 2024-September 2025.

BoE policy statement key takeaways

"Staff forecast Q3 GDP 0.3% QQ (Aug forecast: 0.4%), underlying pace 0.3% in H2."

"We need to be careful not to cut rates too fast or by too much."

"Inflation to rise to around 2.5% in Q4 2024 (Aug forecast: Q4 CPI around 2.75%)."

"Most MPC members think gradual approach to cutting rates will be warranted."

"Monetary policy will need to continue to remain restrictive for sufficiently long."

"Range of views on inflation persistence among 8 MPC members who voted to hold rates."

"We should be able to cut rates gradually if that continues."

"QT has proceeded smoothly, no evidence of damage to market functioning."

Labour market continues to loosen but tight by historical standards."

"Unlikely QT has made material difference to appropriate path for bank rate over past year."

"Policymaker Dhingra voted to cut rates by 0.25 percentage points."

"Inflationary pressures have continued to ease since August meeting, economy broadly as expected."

"Staff model suggests underlying unemployment has increased steadily over past quarters, in contrast to official data."

Market reaction to BoE rate decision

Pound Sterling gathered strength with the immediate reaction to the BoE's policy announcements. At the time of press, GBP/USD was trading at its highest level since March 2022, slightly above 1.3300.

 

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This section below was published as a preview of the Bank of England's (BoE) monetary policy decisions at 06:00 GMT.

• 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.