Bank of England Keeps Interest Rates Unchanged, Pound Jumps to Highest Level in Two Years

The Bank of England (BOE) has announced its latest interest rate decision, voting 8:1 to maintain interest rates at 5%. This decision aligns with market expectations and marks a cautious approach to future interest rate cuts.

Bank of England Governor Bailey stated, “We should be able to gradually lower interest rates over time.” However, he emphasized that this path will depend on continued easing of price pressures, and keeping inflation low is critical. As a result, policymakers must be careful not to cut interest rates too quickly or too much.

The meeting statement reiterated policymakers’ preference for interest rate decisions and the need for policy to remain restrictive for a sufficiently long period. This cautious approach may dampen market expectations of faster rate cuts later this year.

Following the decision, money markets have reduced bets on how much the Bank of England will cut interest rates this year, with an expected rate cut of 41 basis points in December, compared to 50 basis points before the decision was announced. UK government bond prices fell, with the ten-year bond yield rising 3 basis points to 3.88% and the two-year bond yield rising 2 basis points to 3.92%.

Dean Turner, chief European economist at UBS, commented that the decision to keep the base rate unchanged is consistent with their long-term view that the central bank will take a cautious approach at the beginning of the interest rate cutting cycle. Turner expects the Bank of England to cut interest rates for the second time this year in November.

Pound Exchange Rate Jumps to Highest Level in Two Years

The pound exchange rate jumped 0.8% in the short term after the BOE meeting, exceeding US$1.33 for the first time since March 2022. As of writing, GBP/USD is currently trading at 1.3287, with the intraday gain slightly reduced to 0.57%.

Jordan Rochester, head of macro strategy at Mizuho International, stated, “Everything here points to a gradual rate cut on a quarterly basis, at best.” He expects GBP/USD to continue performing well, with the pair expected to break above 1.34 by early October and 1.40 by the end of 2025.

The pound’s rally extends its 2024 gains, making it the best-performing G10 currency so far in 2024. Although the market expects the Bank of England to cut interest rates again in November, UK price pressures are expected to be more persistent, and UK interest rates will remain relatively high.