- The Bank of England is set to hold its interest rate at 5.0% on Thursday.
- United Kingdom’s annual inflation was stable at 2.2% in August.
- BoE policy announcements are likely to rock the Pound Sterling.
After a close call in August, the Bank of England’s (BoE) September interest rate decision is keenly awaited for fresh cues on the bank’s future policy action and the pace of its bond sales.
Thursday’s meeting is not a “Super Thursday” – there won’t be any Monetary Policy Report (MPR) or a press conference from Governor Andrew Bailey –, but the United Kingdom (UK) central bank’s announcements at 11:00 GMT are likely to have a significant impact on the performance of the Pound Sterling (GBP).
What to expect from the Bank of England policy announcements?
The Bank of England is widely expected to hold the key interest rate at 5.0% following its September policy meeting, with the key focus likely on the language in the policy statement and the Monetary Policy Committee’s (MPC) voting composition.
The BoE is seen sticking to its cautious stance on the easing path amid elevated services inflation in the UK, as it awaits the Autumn Budget from the new Labour government on October 30. No new economic projections could also dissuade the central bank from committing to any forward guidance.
Back in August, the BoE lowered the key policy rate by 25 basis points (bps) to 5.0% from 5.25%, with a 5-4 MPC vote in favor of such a move. Chief Economist Huw Pill preferred to maintain the rate at 5.25%.
Jonathan Haskel, another MPC member, voted to keep rates on hold in August but he has since been replaced by Alan Taylor. Markets are uncertain about Taylor’s policy stance, anticipating him to go with the majority during his first rate-setting meeting.
August inflation data released on Wednesday showed that the Consumer Price Index (CPI) rose at an annual pace of 2.2%, staying above the BoE’s 2.0% target while coming in below the central bank’s expectations of 2.4% in the reported period. However, the rebound in the UK services inflation to 5.6% in August from July’s 5.2% remains a cause for concern, adding to the odds that the BoE will maintain its cautious outlook on the policy path.
Adding to this, Althea Spinozzi, Head of Fixed Income Strategy at Saxo Bank said, “while wage growth has surprised to the downside, with the 3-month average weekly earnings at 4% (down from 4.5%), it remains significantly higher than pre-pandemic levels. This is keeping real disposable income elevated compared to the 2010-2020 average, adding to the inflationary backdrop.”
Previewing the BoE policy decision, Althea noted: “The Bank of England is expected to keep rates steady in September, reflecting a cautious approach due to persistent inflation, especially in services, and elevated wage growth.”
“The BoE is likely to announce a further £100 billion reduction in gilt holdings in the next twelve months, reducing the need for active sales, which could provide fiscal relief for the government in light of the Autumn Statement,” she added.
How will the BoE interest rate decision impact GBP/USD?
The Pound Sterling has entered a consolidative phase against the US Dollar, having tested offers above the 1.3200 threshold earlier this week. Will the BoE policy verdict revive the GBP/USD uptrend?
If the BoE communication suggests the bank’s prudence on the future easing cycle, markets would perceive that as a hawkish hold, providing a fresh boost to the Pound Sterling. In such a case, GBP/USD could stretch higher toward the 1.3300 mark. Alternatively, should the central bank acknowledge the progress in the disinflationary trend and express concerns over the economic prospects, it could fan expectations for further rate cuts this year, dragging the pair back toward 1.3000.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for GBP/USD:
“The GBP/USD pair settled Wednesday above the falling trendline resistance on the daily chart at 1.3199, yielding a technical breakout. The 14-day Relative Strength Index (RSI) holds comfortably above the 50 level, currently near 60, suggesting that upside risks remain intact in the near term.
“Buyers, however, need to find a strong foothold above the 1.3250 psychological level to take on the upside. The next topside barriers are seen at the multi-year high of 1.3297 and 1.3350. Alternatively, acceptance below the 21-day Simple Moving Average (SMA) at 1.3153 is critical for a sustained correction. Further down, the July 17 high of 1.3045 will come to the rescue of the Pound Sterling should the downside extend. At that level, the 50-day SMA hangs around,” Dhwani adds.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.