The British Pound surged against the Euro and US Dollar following the Bank of Englandās August rate decision, defying market expectations of a more dovish tone.
Despite cutting interest rates by 25 basis points to 4.00%, the Bank of England (BoE) surprised markets with a hawkish messageāhighlighting inflation risks and suggesting further rate cuts may not come as soon as expected.
š Key Market Reaction: Sterling Strengthens
The BoEās decision sparked an immediate rally in the Pound:
- GBP/USD climbed to a 10-day high of 1.3425, up from 1.3375
- GBP/EUR rose to 1.1520, from just above 1.1460
This jump came as traders responded not just to the cut itself, but to the central bank’s less dovish-than-expected toneand revised inflation forecasts.
š¦ Rate Decision: A Split Committee and Hawkish Signals
The Monetary Policy Committee (MPC) voted 5-4 in favour of a 25bps rate cut:
- 4 members voted to hold rates steady
- 4 backed a 25bps cut
- MPC member Catherine Taylor initially voted for a 50bps cut, but supported 25bps in a second vote, tipping the balance
This tight vote surprised markets and suggested growing hesitation within the BoE about easing policy further.
š Inflation Forecasts Revised Higher
The BoE also raised its inflation outlook, reinforcing the hawkish tone:
- CPI is now expected to peak at 4.0% in September (up from 3.7%)
- The 1-year inflation forecast was lifted to 2.7% (from 2.4%)
These changes reflect ongoing global cost pressures and domestic policy impacts, including National Insurance hikes.
š£ļø Governor Bailey: āFuture Cuts Will Be Gradualā
Governor Andrew Bailey described the August decision as āfinely balancedā, noting that future cuts will need to be gradual and carefully assessed. This aligns with the MPCās revised guidance, which pushes back against aggressive market expectations for steady quarterly cuts.
š§ Analyst View: āHawkish Surpriseā Shakes Expectations
Rob Wood, Chief UK Economist at Pantheon Macroeconomics, called the decision a “hawkish surprise”:
āThe tone of the minutes and updated forecasts suggests the MPC is now less inclined to cut further this year.ā
He emphasized the shift in guidance and upward inflation revisions as signals that the BoE wants to avoid easing too quickly.
Pantheon now expects no further rate cuts in 2025, noting growing concerns that policy may already be close to neutralāno longer clearly restrictive.
š Market Outlook: Fewer Cuts Ahead?
With inflation remaining stubbornly high and internal divisions within the MPC, markets have scaled back expectations of further rate cuts this year.
The Bank of England appears to be reasserting control over the narrative, refocusing attention on inflation risks rather than automatic rate reductions.
š Takeaways
- BoE cuts rates by 25bps to 4.00%, but signals caution
- Pound Sterling spikes against USD and EUR
- Inflation forecasts raised, surprising markets
- No further cuts are fully priced in for 2025
- Analysts now expect the BoE to pause for the rest of the year
š¬ What This Means for You
Whether you’re a trader, investor, or simply tracking the UK economy, this decision signals a more complex rate path ahead. Inflation remains the BoE’s top concern, and the bank may be nearing the end of its easing cycleāat least for now.
š Stay tuned for our ongoing coverage of UK monetary policy and market reaction. Subscribe for the latest updates!
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