The Bank of England’s (BoE) September interest rate decision is in sharp focus, with markets eagerly awaiting signals on the central bank‘s future policy direction and bond sale pace. Although Thursday’s meeting won‘t feature a Monetary Policy Report (MPR) or a press conference from Governor Andrew Bailey, the 11:00 GMT announcement is expected to significantly impact the Pound Sterling (GBP).
What to Expect from the BoE Policy Announcements
The BoE is widely expected to hold the key interest rate steady at 5.0% during its September meeting. The market’s attention will primarily be on the policy statement language and the voting composition of the Monetary Policy Committee (MPC).
With elevated services inflation and the upcoming Autumn Budget on October 30, the BoE is likely to maintain a cautious stance on easing its policy. The absence of new economic projections may further deter the bank from committing to any forward guidance.
In August, the BoE reduced the key rate by 25 basis points to 5.0%, with a narrow 5-4 MPC vote. Chief Economist Huw Pill was among those favoring the previous rate of 5.25%. Alan Taylor, the latest addition to the MPC, is expected to align with the majority in his first rate-setting decision, although his exact stance remains uncertain.
August’s inflation data showed the Consumer Price Index (CPI) rose 2.2% annually, above the BoE’s 2.0% target but below its 2.4% forecast. A rebound in services inflation to 5.6% in August from 5.2% in July continues to pressure the bank’s cautious policy approach.
Althea Spinozzi, Head of Fixed Income Strategy at Saxo Bank, noted that although wage growth has moderated, with the 3-month average weekly earnings at 4%, it remains above pre-pandemic levels, contributing to a persistent inflationary backdrop. Spinozzi expects the BoE to maintain rates due to ongoing inflation concerns and elevated wage growth. She also anticipates the BoE will announce a further £100 billion reduction in gilt holdings over the next year, which could reduce the need for active sales and provide fiscal relief in light of the Autumn Statement.
Impact of BoE Rate Decision on GBP/USD
The Pound Sterling has been consolidating against the US Dollar, testing levels above 1.3200. The BoE’s policy decision could be pivotal in determining whether GBP/USD resumes its uptrend.
A cautious but steady communication from the BoE could be seen as a hawkish hold, potentially pushing GBP/USD towards the 1.3300 level. Conversely, acknowledgment of progress in the disinflationary trend could stoke expectations of further rate cuts, driving the pair back towards 1.3000.
Dhwani Mehta, FXStreet’s Asian Session Lead Analyst, notes that GBP/USD has broken above a key resistance trendline, with technical indicators suggesting upside potential. However, sustained gains would require the pair to hold above the 1.3250 level, with the next targets at 1.3297 and 1.3350. On the downside, a drop below the 21-day Simple Moving Average (SMA) at 1.3153 could signal a deeper correction, with support around the July 17 high of 1.3045.
The BoE’s rate decision and its forward guidance will be closely scrutinized, with the market keenly watching for any shifts in tone that could influence the GBP’s trajectory.
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