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Bank of England leaves interest rate unchanged at 4.75% as expected

The Bank of England (BoE) announced on Thursday that it left the policy rate unchanged at 4.75% following the December policy meeting, as expected.

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Follow our live coverage of the Bank of England interest rate decision and the market reaction.

This section below was published as a preview of the Bank of England’s (BoE) monetary policy decisions at 06:00 GMT.

  • The Bank of England is set to keep the interest rate on hold, hinting at 2025 action.
  • UK inflation accelerated further in November, albeit within expectations.
  • GBP/USD trades within a well-limited 200 pips range ahead of the announcement. 

The Bank of England (BoE) will announce its decision on monetary policy on Thursday after completing the last meeting of 2024. The BoE is widely anticipated to keep the benchmark rate on hold at 4.75%, resulting in a measly 50 basis points (bps) trim throughout 2024. At the time being, financial markets are pricing in another 63 bps in cuts for 2025, down from 80 bps a week before. 

BoE’s cautious approach to rate cuts persists

The odds for additional interest rate cuts ahead decreased following the release of the United Kingdom’s (UK) monthly employment report, which showed an unexpected uptick in wages. Average Earnings Excluding Bonus, a key measure of wage growth, rose by 5.2% in the three months to October, surpassing estimates of 5% and higher than the previous 4.9%. 

The figures struck a chord, although inflation figures released afterwards were in line with expectations.

On Wednesday, the UK reported that the November Consumer Price Index (CPI) rose 2.6% on a yearly basis in November, higher than the 2.3% posted in October, yet matching the market’s expectations. Core CPI annual inflation, in the meantime, rose to 3.5% in November, above the previous 3.3%, while below the market consensus of 3.6%.

It is worth noting that yearly inflation posted an encouraging 1.7% in September, with the subsequent increase reinforcing BoE’s cautious stance amid concerns about persistent inflationary pressures. 

Ahead of the event, Governor Andrew Bailey said in an interview that the BoE could be on track for four interest rate cuts over the next year if inflation continues its downward path. Yet before such comment, he also said the BoE would need to take a “gradual” approach to lowering rates. The latest employment and inflation-related figures reinforce the idea of a cautious approach and, hence, the expected on-hold decision.

Beyond the decision itself, market players will also pay attention to how voting splits. The nine Monetary Policy Committee (MPC) members are responsible for making decisions about the bank rate. They can vote to cut, hike or keep interest rates on hold. The more votes in one direction or the other, the more the market will see it as a hint of future action. For this December meeting, market participants anticipate eight MPC members will vote to keep rates on hold and one member to vote in favor of a cut. 

Finally, the BoE will release alongside the Monetary Policy Report a document explaining what backed their decision and, more relevantly, officials’ economic outlook, the latter seen as a hint towards future decisions.

Federal Reserve’s hawkish cut

The Federal Reserve (Fed) deserves a separate chapter ahead of the BoE’s decision, as the United States (US) central bank announced its decision on monetary policy late on Wednesday, boosting demand for the US Dollar (USD) across the FX board.

The Fed cut the benchmark interest rate by 25 basis points (bps)   as widely anticipated. Yet, the Summary of Economic Projections (SEP) or dot plot triggered a risk-averse reaction, as policymakers confirmed an upcoming pause in rate cuts through 2025. Updated projections and Chairman Jerome Powell’s press conference showed officials opted for a more cautious approach amid sticky inflation and the return of former President Donald Trump to the White House.

The announcement pushed the USD sharply up while stock markets collapsed. The GBP/USD pair posted a fresh December low of 1.2560, bouncing just modestly afterwards. 

How will the BoE interest rate decision impact GBP/USD?

As said, the BoE is expected to keep the benchmark interest rate on hold. The decision is largely priced in, which means the British Pound (GBP) will hardly react to the announcement unless there is a huge surprise. The news market mover will be the MPC voting spread. The more members vote for a cut, the more dovish will be seen the decision and could result in a GBP slide. The opposite scenario is also valid. Finally, speculative interest will assess the Monetary Policy Report and Governor Bailey’s words to determine how hawkish or dovish the BoE is today. 

Valeria Bednarik, Chief Analyst at FXStreet, notes: “In the case of a dovish outcome, GBP/USD could turn bearish. Still, if the announcement aligns with recent Bailey’s comments on four rate cuts coming in 2025, the decline could be shallow, given that it would lack the surprise factor that usually results in wider price reactions. On the contrary, a hawkish surprise or hints of fewer rate cuts next year could result in GBP/USD turning bullish.”

Bednarik adds: “The GBP/USD pair trades at levels last seen in November, in the Fed’s aftermath, and looks poised to extend its decline, particularly if the fresh monthly low at 1.2560 gives up. The next relevant support comes at the 1.2486 November low, while a break below the latter exposes the 1.2420 price zone. A critical resistance level is the former December low at 1.2698, en route to the top of the recent range at 1.2810.”

Pound Sterling FAQs

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.