BoE Expected To Keep Interest Rate Policy Unchanged

On Thursday, the Bank of England is expected to keep interest rates unchanged and to maintain its higher-for-longer stance. UK economists believe the Bank of England will use this week’s interest rate decision to warn that borrowing costs will need to remain high well into 2024, dampening growing bets on a June rate cut.

Governor Andrew Bailey and his team have emphasized lingering inflationary concerns to support their guidance that rates will need to remain at their highest level in 15 years for the foreseeable future. This is unlikely to be a game changer for GBP/USD, as the focus will be on dollar dynamics following the release of US CPI on Tuesday and new Fed economic projections on Wednesday.

Although market participants expect the Bank of England to cut interest rates, the question is when this will be a viable option. Swap markets anticipate 75 basis point rate cuts over the next year, with the Bank of England expected to be the last of the three major central banks to ease monetary policy, following the ECB and the Fed.

The western world’s largest central banks are expected to hold interest rates unchanged this week, despite growing expectations for sharp reductions in borrowing costs next year. Threadneedle Street policymakers have indicated that UK interest rates will need to remain at their current level of 5.25% for an extended period of time in response to persistently high inflation in the UK, dismissing the prospect of rate cuts anticipated by financial markets.

The Bank of England is most concerned about wage growth, which is currently 7.9%, and services inflation, which is 6.6%. It appears to be behind some of the dissent on the Monetary Policy Committee among those who still want higher rates, though the number of external members of the MPC has shifted to three.

It will be interesting to see if they abandon their dissent and opt for the status quo this week, with markets already pricing in some rate cuts for next year, though these are likely to come well after the ECB begins cutting, with inflation in the UK still more than 2% higher than in the EU on an annualised basis.

Wages in the United Kingdom have risen by around 8% in the last three months, and wage growth is expected to slow from 7.9% to %. As Q3 begins, this week’s October GDP figures will provide insight into Q4, though weather-related events may also have an impact.