- The Bank of England is set to keep the interest rate on hold, hinting at 2025 action.
- UK inflation accelerated further in November, albeit within expectations.
- GBP/USD trades within a well-limited 200 pips range ahead of the announcement.
The Bank of England (BoE) will announce its decision on monetary policy on Thursday after completing the last meeting of 2024. The BoE is widely anticipated to keep the benchmark rate on hold at 4.75%, resulting in a measly 50 basis points (bps) trim throughout 2024. At the time being, financial markets are pricing in another 63 bps in cuts for 2025, down from 80 bps a week before.
BoE's cautious approach to rate cuts persists
The odds for additional interest rate cuts ahead decreased following the release of the United Kingdom's (UK) monthly employment report, which showed an unexpected uptick in wages. Average Earnings Excluding Bonus, a key measure of wage growth, rose by 5.2% in the three months to October, surpassing estimates of 5% and higher than the previous 4.9%.
The figures struck a chord, although inflation figures released afterwards were in line with expectations.
On Wednesday, the UK reported that the November Consumer Price Index (CPI) rose 2.6% on a yearly basis in November, higher than the 2.3% posted in October, yet matching the market’s expectations. Core CPI annual inflation, in the meantime, rose to 3.5% in November, above the previous 3.3%, while below the market consensus of 3.6%.
It is worth noting that yearly inflation posted an encouraging 1.7% in September, with the subsequent increase reinforcing BoE’s cautious stance amid concerns about persistent inflationary pressures.
Ahead of the event, Governor Andrew Bailey said in an interview that the BoE could be on track for four interest rate cuts over the next year if inflation continues its downward path. Yet before such comment, he also said the BoE would need to take a “gradual” approach to lowering rates. The latest employment and inflation-related figures reinforce the idea of a cautious approach and, hence, the expected on-hold decision.
Beyond the decision itself, market players will also pay attention to how voting splits. The nine Monetary Policy Committee (MPC) members are responsible for making decisions about the bank rate. They can vote to cut, hike or keep interest rates on hold. The more votes in one direction or the other, the more the market will see it as a hint of future action. For this December meeting, market participants anticipate eight MPC members will vote to keep rates on hold and one member to vote in favor of a cut.
Finally, the BoE will release alongside the Monetary Policy Report a document explaining what backed their decision and, more relevantly, officials' economic outlook, the latter seen as a hint towards future decisions.
Federal Reserve’s hawkish cut
The Federal Reserve (Fed) deserves a separate chapter ahead of the BoE’s decision, as the United States (US) central bank announced its decision on monetary policy late on Wednesday, boosting demand for the US Dollar (USD) across the FX board.
The Fed cut the benchmark interest rate by 25 basis points (bps) as widely anticipated. Yet, the Summary of Economic Projections (SEP) or dot plot triggered a risk-averse reaction, as policymakers confirmed an upcoming pause in rate cuts through 2025. Updated projections and Chairman Jerome Powell’s press conference showed officials opted for a more cautious approach amid sticky inflation and the return of former President Donald Trump to the White House.
The announcement pushed the USD sharply up while stock markets collapsed. The GBP/USD pair posted a fresh December low of 1.2560, bouncing just modestly afterwards.
How will the BoE interest rate decision impact GBP/USD?
As said, the BoE is expected to keep the benchmark interest rate on hold. The decision is largely priced in, which means the British Pound (GBP) will hardly react to the announcement unless there is a huge surprise. The news market mover will be the MPC voting spread. The more members vote for a cut, the more dovish will be seen the decision and could result in a GBP slide. The opposite scenario is also valid. Finally, speculative interest will assess the Monetary Policy Report and Governor Bailey’s words to determine how hawkish or dovish the BoE is today.
Valeria Bednarik, Chief Analyst at FXStreet, notes: “In the case of a dovish outcome, GBP/USD could turn bearish. Still, if the announcement aligns with recent Bailey’s comments on four rate cuts coming in 2025, the decline could be shallow, given that it would lack the surprise factor that usually results in wider price reactions. On the contrary, a hawkish surprise or hints of fewer rate cuts next year could result in GBP/USD turning bullish.”
Bednarik adds: “The GBP/USD pair trades at levels last seen in November, in the Fed’s aftermath, and looks poised to extend its decline, particularly if the fresh monthly low at 1.2560 gives up. The next relevant support comes at the 1.2486 November low, while a break below the latter exposes the 1.2420 price zone. A critical resistance level is the former December low at 1.2698, en route to the top of the recent range at 1.2810.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Economic Indicator
BoE Interest Rate Decision
The Bank of England (BoE) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoE is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Pound Sterling (GBP). Likewise, if the BoE adopts a dovish view on the UK economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for GBP.
Read more.Next release: Thu Dec 19, 2024 12:00
Frequency: Irregular
Consensus: 4.75%
Previous: 4.75%
Source: Bank of England
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