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A follow-up June interest rate cut is no longer a sure bet.
The British Pound rallied against the Euro, Dollar, and other currencies after the Bank of England cut interest rates by 25 basis points and reaffirmed its commitment to a cautious stance when considering future interest rate cuts.
The decision to cut 25bp comes amid speculation that the Bank might have accelerated the pace at which it lowers rates by cutting by 50bp.
Indeed, two members of the Monetary Policy Committee did vote for a 50bp move.
However, two others voted to keep interest rates unchanged, confirming that there is still strong resistance to accelerating the speed at which further cuts are delivered.
Also, the Bank reaffirmed that due to the medium-term outlook for inflation, "a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate."
Some economists had expected the line to be jettisoned in order for the Bank to prepare markets for a June rate cut. Keeping it reads as a central bank that will stick with a quarterly pace of cuts owing to the significant uncertainties facing the economy and inflation.
The decision and guidance were more 'hawkish' than expected, meaning the Bank has opted to maintain a higher-for-longer interest rate profile. The de facto FX reaction to such hawkish surprises is a strengthening of the Pound:
The Pound to Euro exchange rate rose 0.40% in the 15-minute window following the initial decision to 1.1788. The Pound to Dollar exchange rate rose by a similar margin to 1.3312.
"The GBP outperformed as the BoE reiterated a gradual approach to its easing cycle and 2 MPC members voted in favour of leaving rates unchanged. Expectations of an imminent UK/US trade deal also supported the pound overnight," says Luis Hertado, an analyst at CIBC Capital Markets.
The Bank's forecasts released in the Monetary Policy Report underline the challenges facing the Bank as it now predicts inflation to peak at 3.7% in September, up from February's anticipated peak of 3.5%.
However, the Bank still seems convinced it will win the war against inflation as its projections show inflation will then dip to 1.9% by the second quarter of 2027.
The Bank argues that this medium-term projection is consistent with it meeting its mandate and provides the cover to cut interest rates.
The medium-term inflation forecasts were lowered owing to a slightly greater expected margin of economic slack and a weaker contribution from import price pass-through (due in part to a stronger sterling and lower global trade price pressures).
Above: GBP/EUR at 15-minute intervals.
The Pound's rally following the decision shows "the market was coming into this meeting rather dovish, with some anticipation that tariffs will drive the BoE towards a faster pace of cuts," explains Hurtado. "This is not seen to be the case with some volatility in GBP/USD on the initial sticker shock of the voting composition showing more discord and higher tails."
What will matter for the UK currency going forward is the evolution of global investor sentiment, where hopes for trade deals have quelled market volatility and allowed the GBP to recover against the Euro and safe-haven currencies since an early April slump.
The other driver will be how upcoming UK data releases - inflation in particular - influence expectations for future Bank of England interest rates.
Above: The Bank of England's inflation forecast.
Following today's decision, economists at DNB Bank say there will be just one more cut from the Bank in August, after which it will pause. This would represent a 'hawkish' profile for UK interest rates and ongoing GBP gains.
However, Simon Dangoor, Head of Fixed Income Macro Strategies at Goldman Sachs Asset Management, says there's a risk that the Bank could accelerate its easing pace, "potentially reaching a 3% terminal rate if economic headwinds intensify and inflation proves less persistent than feared.”
Such an outcome would, on balance, weigh on the Pound.
However, today's decision shows this is a cautious MPC with a diverse set of views on show, which ultimately reflects the domestic and global uncertainties that abound. This diversity and robust decision-making will bolster the Bank's credibility and offer UK financial markets and the economy some welcome certainty.