File image of Governor Bailey. Bailey voted against his chief economist and deputy in favour of cutting interest rates amidst rising inflation. Image copyright: Bank of England.
Pound Sterling rose following the Bank of England's August 07 policy decision.
The Pound to Euro exchange rate rose to as high as 1.1540 on the day the Bank of England cut interest rates by 25 basis points and signalled it will become increasingly difficult to continue with further cuts due to rising inflation.
A prolonged pause to the Bank of England's rate cutting cycle is now possible, and this could prove supportive to the Pound over the coming weeks.
The decision to cut on Thursday was not a popular one, as four members of the Monetary Policy Committee (MPC) voted to keep interest rates unchanged over fears that it was the wrong move given elevated inflation.
The vote having to be recast following a deadlock indicates the strength of feeling of those opposed to cutting interest rates and warns that further cuts are not a given. Crucially, the Bank's Chief Economist and Deputy Head of Monetary Policy voted against the cut.
"To have such a second round of voting is unprecedented for the MPC. The vote split gives a hawkish message, which fits with the overall tone of the minutes of the meeting and of the quarterly Monetary Policy Report," says Sandra Horsfield, an economist at Investec.
The Monetary Policy Report showed the Bank raised its CPI inflation forecasts for both 2025 and 2026, which is a sign that interest rates are potentially already too low.
"One of the most troubling aspects for the Bank of England is that the current drivers of inflation, namely food and energy, are so visible to consumers that this could entrench inflation amid higher wage demands, even if developments in the rest of the inflation basket are less concerning. This will make it difficult to achieve the 'last mile' of inflation reduction necessary to allow the Bank to shift its focus to supporting economic growth," says Richard Potts, Economist at Bondford.
Expectations for a November rate cut have dropped following the decision, and GBP rose against the majority of the world's currencies.
"GBP, meanwhile, has strengthened by 0.5% against USD and 0.6% against EUR. This seems an eminently justifiable reaction to us," says Horsfield.
Above: GBP/EUR rises, but follow-through now needed.
The Pound fell against the Euro and other currencies through July as investor expectations for deeper cuts at the Bank steadily rose on account of a string of below-consensus economic data releases that suggested the economy was increasingly in need of assistance.
Interest rate cuts can provide that assistance, and five members of the MPC ultimately opted to lower lending costs as a result.
But, the Bank's primary mandate is to bring inflation down to 2.0%, and it might not be until 2027 that this happens, according to the Bank's own projections.
"We believe this guidance hints at keeping the Bank Rate unchanged for a period ahead," says Knut A. Magnussen, a strategist at DNB Carnegie.
Should financial markets steadily price out further rate cuts, then the Pound could extend its recent rally.
Pound Sterling might have risen sharply following the Bank of England decision, as would be expected when the overall guidance is 'hawkish' in nature. But it's still too soon to call this the start of a new uptrend, and we would need technical confirmation that we're not just witnessing a knee-jerk reaction.
Recent history doesn't inspire confidence: the Pound-Euro advanced 0.54% on Thursday, which is less than the 0.75% jump printed on July 28th, just two weeks ago. That rise took the pair to as high as 1.16 within a space of three days.
But this late-July move soon faltered and the exchange rate quickly fell back to 1.1450 just two days later.
An inability to extend rallies speaks of structural resistance to GBP strength, which could disappoint those looking for a higher Pound in the wake of the August Bank of England decision.