Market participants remain divided on the imminent interest rate decision by the Bank of England (BoE), scheduled for Thursday. The central bank has kept its policy rate steady at 5.25% for the last seven meetings. However, recent investor repricing suggests a potential 25 basis point (bps) rate cut this week.
MPC Vote Expected to Be Close
The upcoming policy decision by the BoE is anticipated to be a tight call, with market pricing indicating a 63% probability of a quarter-point cut. The Monetary Policy Committee (MPC) vote could be as close as 5-4 in favor of a rate reduction.
In June, the MPC decided to maintain rates with a 7-2 vote. Those voting to hold rates mentioned their decision was “finely balanced,” hinting that a rate cut might be forthcoming.
Inflation Pressures
Disinflationary pressures appeared to stall in June, as the headline Consumer Price Index (CPI) rose by 2.0% over the previous year, matching May’s reading. Core CPI, excluding food and energy costs, also remained steady, advancing by 3.5%. Additionally, service inflation rose by 5.7% year-over-year, surpassing the central bank’s 5.1% projection.
BoE’s Chief Economist Huw Pill suggested the bank was nearing a decision to cut interest rates, though he expressed concerns over persistent service price inflation and wage growth. Pill had previously joined the majority in voting to keep rates at 5.25% in June.
Conversely, MPC member Catherine Mann emphasized strong price pressures in the UK economy, indicating she is unlikely to support a rate cut in August. Mann warned that the recent decline in domestic inflation was tenuous and predicted inflation would likely remain above target for the rest of the year.
Expert Opinions
Rabobank’s Senior Macro Strategist, Stefan Koopman, anticipates a 25bps cut to the Bank rate, reducing it to 5.00%, marking the beginning of a gradual easing cycle with quarterly cuts. However, Koopman acknowledged the possibility that officials might want additional data before making a decision.
Analysts at TD Securities also expect a 25bps cut at the August MPC meeting, with a narrow 5-4 vote. They noted high uncertainty, driven by persistent service inflation and changes in the committee’s composition. The MPC’s message is likely to be cautious, avoiding signals of consecutive cuts at this stage.
Impact on GBP/USD
Despite the slowdown in disinflationary pressures in June, market participants largely anticipate a rate cut at the BoE’s meeting on August 1 at 11 GMT.
FXStreet Senior Analyst Pablo Piovano predicts the British Pound will face renewed downside pressure if a rate cut occurs, as this scenario is only partially anticipated by market forecasts. He attributes the GBP/USD rally in early July, which lifted the pair to 2024 peaks near 1.3050, to the weakening US Dollar following expectations of a Federal Reserve rate cut in September.
Piovano suggests that further losses could push GBP/USD below the weekly low of 1.2806 (July 29) and challenge support levels at the 55-day and 100-day Simple Moving Averages (SMAs) at 1.2776 and 1.2682, respectively. Breaching this region could lead to a probable slide to the July low of 1.2615 (July 2), reinforced by the proximity of the key 200-day SMA at 1.2836.
On the upside, Piovano identifies the initial resistance for bulls at the 2024 peak of 1.3044 (July 17).
Related Topics:
- How Does the Bank of England Control Inflation?
- What Are the Advantages of the Bank of England?
- Is the BOE Part of the European System of Central Banks?
