Breaking: BoE holds interest rate steady at 5.25% in split vote

The Bank of England (BoE) announced that it left the policy rate unchanged at 5.25% following the September policy meeting. Markets were expecting the BoE to raise the interest rate by 25 basis points to 5.5%.

The BoE's Monetary Policy Committee (MPC) voted 5-4 in favor of holding the policy rate steady. Governor Bailey, policymakers Broadbent, Dhingra, Pill and Ramsden voted to hold, while Cunliffe, Greene, Haskel and Mann wanted to lift the key rate to 5.5%. The MPC also voted to reduce the stock of gilts by 100 billion GBP in 12 months starting October.

Follow our live coverage of the BOE policy announcements and the market reaction.

According to Reuters' calculations, markets price in a 64% chance of the BoE raising the policy rate by 25 bps in November, down from 81% before the rate announcement. Additionally, investors now see a 55% probability that the BoE will lower the policy rate to 5% in September 2024. 

Key takeaways from the policy statement

"inflation has fallen a lot in recent months, we think it will continue to do so."

"No room for complacency, will take decisions needed to get inflation to target."

"Policy will be sufficiently restrictive for sufficiently long to get inflation to target."

"Further tightening would be needed if evidence of more persistent inflationary pressures."

"MPC majority cite loosening labour market, August CPI readings, falling business sentiment."

"Minority see persistent inflation pressure, drop in August services CPI likely reflects one-off factors."

"One member sees growing risk falling output will require sharper rate cuts."

"Q3 GDP now expected to rise 0.1% (Aug: +0.4%), underlying growth in H2 2023 likely weaker than forecast in August."

"Inflation expected to fall significantly in near term, despite rising oil prices, services inflation set to remain elevated."

"BoE plans in Q4 to hold 4 gilt auctions in each sector with planned size of 670 million GBP each."

"Will continue to sell gilts evenly across short, medium and long buckets."

BoE interest rate market reaction

Pound Sterling came under heavy selling pressure with the immediate reaction to the BoE interest rate announcement. As of writing, GBP/USD was trading at its lowest since late March at 1.2255, losing 0.7% on a daily basis.

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

• The UK central bank is on track for another 25 bps hike on Thursday, lifting interest rate to 5.50%.
• The Bank of England could signal the end of its tightening cycle as economic woes mount.
• Pound Sterling set to rock after surprise fall in UK inflation raises odds of a BoE rate hike pause.  

The Bank of England (BoE) is set for the fifteenth consecutive interest rate hike since December 2021 on Thursday. The Pound Sterling (GBP) is poised for a big reaction even though it is not a ‘Super Thursday’, as it could probably be the final lift-off for one of the United Kingdom’s (UK) greatest tightening cycles in the last century.

However, markets have recently lowered expectations of a rate increase after UK inflation in August came in softer than expected.

Bank of England Interest Rate Decision: What to know in markets on Thursday, September 21

• GBP/USD remains vulnerable at five-month lows near 1.2300, as the US Dollar (USD) clinches fresh a six-month high. 
• The US Dollar and the US Treasury bond yields continue to soar on the hawkish US Federal Reserve (Fed) rate hike pause.
• The Summary of Economic Projections (SEP), the so-called ‘Dot Plot’ chart, showed that the “Fed projections imply one more 25 basis points (bps) rate hike this year and 50 bps of rate cuts in 2024, versus 100 bps of 2024 cuts in June projections.”
• The Swiss National Bank (SNB) unexpectedly left interest rates steady at 1.75% following its September quarterly assessment. 
• US S&P 500 futures drop amid risk-aversion on the Fed’s ‘high for longer’ interest rate view. 
• The BoE policy guidance will hold the key for a clear directional impetus for the GBP/USD pair while the Jobless Claims and Existing Home Sales data from the United States will also entertain Cable traders.

When will the BoE announce its interest rate decision and how could it affect GBP/USD?

The Bank of England is widely expected to raise the benchmark interest rate, the Bank Rate, by 25 basis points (bps) from 5.25% to 5.50% at 11:00 GMT, taking borrowing costs to the highest level since 2007.

The big question is whether it will be the last hurrah for the BoE hawks. The UK central bank could take the lead from the European Central Bank (ECB) and deliver a dovish hike by signaling the end of its rate hike cycle amid increasing risks of stagflation.

In the second quarter, the UK economy defied expectations of stagnation, expanding by 0.2% in the second quarter. However, economists say that the growth outlook appeared grim, as the impact of higher rates had still not fully fed through.

Meanwhile, the Unemployment Rate climbed to 4.3% in the quarter through July from the 4.2% seen during the three months to June. The economy saw an employment loss of 207K in July, having shredded 66K jobs in June. Average Earnings excluding bonuses rose 7.8% 3M YoY in July as expected but at a joint-record pace.

Against the backdrop of a slowing economy and loosening labor market conditions, the BoE could be well-positioned to hint at a pause after the expected rate hike.

Governor Andrew Bailey said earlier this month that the BoE was "much nearer" to ending its tightening cycle. On the other hand, Catherine Mann, a member of the BoE Monetary Policy Committee (MPC), said last week, “I would rather err on the side of over-tightening,” adding that underestimating the persistence of inflation will lead to an overshoot. 

However, the unexpected fall in the UK inflation cast clouds on the BoE’s rate hike plan on Thursday. Bailey and his colleagues could opt for a pause, as services inflation points to easing inflationary pressures. 

The Office for National Statistics (ONS) said on Wednesday that the UK annual Consumer Price Index (CPI) edged 6.7% higher in August, cooling off from a 6.8% rise in July. The market consensus was for a 7.1% increase. 

The Services CPI rose 6.8% YoY vs. July’s 7.4% surge. The ONS said, “the largest downward contributions to CPI rates came from food and accommodation services.”

Markets are pricing a 57% probability of a rate hike pause by the Bank of England, sharply up from about a 20% chance seen before the UK inflation data. Goldman Sachs now expects the BoE to keep its main bank rate unchanged at 5.25% on Thursday and has lowered its forecast for the terminal rate to 5.25% from 5.5% previously.

Analysts at TD Securities (TDS) noted: “Upside surprises to wage data are enough to justify a 25bps hike, but Wednesday's downside shock to August inflation and worries about tepid GDP growth and a rapidly rising unemployment rate lead the MPC to soften forward guidance and votes skew toward a hold, effectively signaling an end to the hiking cycle.”

If the Bank of England delivers a dovish message alongside a 25 bps rate hike or decides to put brakes on its tightening cycle, GBP/USD is likely to see a fresh downswing toward the 1.2250 psychological level. In case the Bank hints at a possibility of one more rate hike by the turn of the year, the Pound Sterling could stage a decent recovery toward the 1.2500 threshold.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “Having consolidated the downside break below the critical 200-Daily Moving Average (DMA) at 1.2433 so far this week, GBP/USD is extending the downtrend even as the 14-day Relative Strength Index (RSI) has entered the oversold territory, suggesting that the pair risks a correction from the multi-month trough.”

Dhwani also outlines important technical levels to trade the GBP/USD pair: “On the upside, recapturing the 200 DMA support-turned-resistance is critical to initiating any meaningful recovery toward the 1.2500 figure. Further up, the descending 21 DMA at 1.2520 will challenge Pound Sterling buyers. Conversely, the immediate support aligns at the April low of 1.2275, below which a sell-off toward the 1.2200 threshold cannot be ruled out.”