The Bank of England is set to keep its policy rate unchanged for the seventh consecutive meeting on Thursday. Despite the recent increase in disinflationary pressures in the UK and speculation about two interest rate cuts this year, the BoE is expected to maintain its benchmark interest rate at 5.25%.
In May, disinflationary pressures accelerated in the UK, leading to speculation that the BoE may consider reducing its policy rate at some point in Q4. Services inflation remained high at +5.7% YoY in May, exceeding expectations. Additionally, inflation figures showed the headline Consumer Price Index (CPI) increasing by 2.0% and the core CPI rising by 3.5%. This was the first time the CPI hit the bank’s goal since October 2021.
Money markets are now anticipating around 45 bps of easing by the BoE by year-end and nearly 30 bps by November. The upcoming inflation readings are not expected to challenge the BoE’s view of starting its easing cycle later in the year. The bank may deliver a cautious message, emphasizing services inflation and the tight domestic labor market.
BoE officials, including Governor Andrew Bailey, have hinted at potential rate cuts to prevent inflation from falling below target. Deputy Governor Ben Broadbent mentioned a possibility of a summer rate cut, depending on the data aligning with the bank’s projections. Megan Greene, who previously noted inflation persistence, has adjusted her stance, acknowledging that inflation persistence has lessened.
Looking ahead, the BoE is likely to maintain its policy rate at 5.25% on Thursday, with a 7-2 vote anticipated. The central bank may provide rate recommendations for the August meeting, emphasizing the importance of upcoming data in decision-making.
In terms of the impact on GBP/USD, the British Pound is expected to remain within its current range following the BoE’s decision. GBP/USD has a constructive bias, with potential gains leading the pair to revisit the June high of 1.2860. On the downside, support levels are seen at the June low of 1.2656, followed by the 100-day and 55-day SMAs.
Overall, the BoE’s decision and accompanying statement will be closely watched by traders and investors, as any hints of future rate cuts or a shift in policy stance could impact the currency markets. The decision is scheduled for Thursday at 11 GMT, with expectations of a cautious approach from the central bank.