Bank of England Rate Decision Outlook: Key Scenarios for the Pound
The Bank of England (BoE) recently held interest rates steady on September 19, surprising markets with an 8-1 vote split in favor of a hold, a shift from the expected 7-2 split. This indicates growing support for maintaining rates, as the BoE expressed that “Monetary policy will need to continue to remain restrictive for sufficiently long.” However, hints at a potential rate-cutting cycle are emerging, with the BoE stating that “in the absence of material developments, a gradual approach to removing policy restraint remains appropriate.” This cautious tone suggests the BoE is approaching a turning point and that any significant dips in inflation or labor data could push the GBP lower.
Recent Economic Indicators: Soft Inflation Fuels Rate Cut Expectations
Headline CPI and Core CPI data for October 16 came in softer than expected, with services inflation at 4.9% y/y, under the BoE’s 5.5% projection. This has driven market expectations for a November rate cut to 86%. On October 23, BoE Governor Bailey acknowledged that disinflation has progressed faster than anticipated in the UK and globally. Despite this, some voices within the BoE remain cautious. Catherine Mann, the most hawkish MPC member, warned on October 24 against premature cuts, citing concerns over a potential structural persistence between wages and prices.
Key Voices and Mixed Signals on Rate Cuts
While the BoE appears to lean toward easing, it has been careful with its messaging. Both Bailey and BoE Chief Economist Huw Pill have emphasized a “gradual” approach, balancing the desire to manage inflation without prematurely undermining economic growth. Bailey’s remarks on October 3 hinted at the possibility of “aggressive rate cuts” if inflation continues to ease. However, Pill countered this with calls for “caution” on October 4, reflecting a measured stance from the BoE on cutting rates too quickly.
Budget and Economic Outlook: Influencing the Pace of Easing
The recent UK budget, viewed by analysts as a factor supporting a slower pace of easing, includes significant upfront spending and a looming increase in business labor costs. Pantheon Macroeconomics has noted that this fiscal context could pressure the MPC to proceed with caution, expecting inflation pressures to potentially rebound. ING’s analysis reinforces this view, pointing out that while the BoE may cut rates, it’s likely to be gradual unless there are sharper-than-expected drops in inflation and growth figures.
ING's Rate Cut Scenarios: Potential Impacts on GBP
ING provides a structured view of possible BoE rate cut decisions and their expected market impacts:
1. 25bps Rate Cut with a 9-0 Vote (Cut vs. Hold):
- BoE Comments: Growing concerns on downside growth risks, recent services inflation weakness.
- Market Impact: GBP/USD drops ~100 pips; 10-year yield falls ~10 basis points.
- Implication: The BoE appears united in addressing economic headwinds, signaling more cuts could be on the way, which would likely weigh on the GBP.
2. 25bps Rate Cut with a 7-2 Vote (Cut vs. Hold) - ING Base Case:
- BoE Comments: Growth outlook modestly stronger due to budget support; inflation impact from recent services undershoot minimal in medium-term.
- Market Impact: GBP/USD dips ~50 pips; 10-year yield drops ~5 basis points.
- Implication: A cautious cut reflecting gradual easing; the GBP might weaken slightly but not experience a drastic sell-off.
3. 25bps Rate Cut with a 5-4 Vote (Hold vs. Cut):
- BoE Comments: Budget expected to impact 2025 growth, medium-term inflation effect unclear; inflation close to 2% in two years.
- Market Impact: GBP/USD rises ~50 pips; 10-year yield unchanged.
- Implication: A narrowly divided decision might signal reluctance to ease aggressively, supporting the GBP in the short term.
4. No Rate Cut with a 5-4 Vote (Hold vs. Cut):
- BoE Comments: Rates remain on hold due to budget factors; gradual wage and inflation pressures declining.
- Market Impact: GBP/USD gains ~150 pips; 10-year yield rises ~10 basis points.
- Implication: Holding rates despite easing pressures could surprise markets, sparking a GBP rally as the BoE demonstrates a focus on stability.
What to Expect Next: Key Drivers for the Pound
As the BoE contemplates its next moves, market participants should watch for a few key developments:
- If the BoE Signals Less Need to Cut Rates: A restrained stance or lack of clear rate cut signals will likely drive GBP strength. Given the cautious tones from both Bailey and Pill, the BoE may lean toward maintaining stability, especially if inflation indicators remain stubborn.
- If the BoE Cuts Rates and Signals Further Cuts: A rate cut combined with signals of more aggressive easing would likely lead to GBP selling, but signalling will b eimportant here.
Conclusion: Prepare for Potential Volatility
In a context of mixed signals, both bulls and bears in the GBP market have reason to be cautious, but traders should keep an eye on data releases and BoE statements as these will likely define the currency’s path in the short term.