The Bank of England (BoE) is widely expected to keep its interest rate steady at 5.0% during its September policy meeting. This decision comes after the bank lowered the rate by 25 basis points (bps) in August, amid ongoing concerns over persistent inflation, particularly in the services sector. The BoE is likely to adopt a cautious stance as it waits for more clarity on the economic outlook, especially with the upcoming Autumn Budget from the new Labour government.
Key Takeaways:
The BoE is expected to keep its interest rate at 5.0% in September.
Persistent inflation, particularly in services, is a primary concern.
The BoE may reduce gilt holdings by £100 billion over the next 12 months.
The GBP/USD could see volatility depending on the BoE's policy language.
BoE Rate Hikes on Hold as Inflation Pressures Persist
Key Reasons Behind the Pause in BoE Rate Hikes
1. Inflation Remains a Concern
Despite a stable annual inflation rate of 2.2% in August, the BoE is wary of the rebound in UK services inflation, which rose to 5.6% from July's 5.2%. This increase suggests that underlying price pressures remain strong, warranting a cautious approach to monetary policy.
2. Uncertainty Over Future Policy Moves
The composition of the Monetary Policy Committee (MPC) has changed, with Alan Taylor replacing Jonathan Haskel, who previously voted to hold rates. Taylor’s stance is yet to be determined, but markets are anticipating that he may align with the majority, adding to the uncertainty about the BoE's future policy direction.
3. Impact on the Pound Sterling
The BoE's decision is expected to significantly impact the Pound Sterling (GBP). If the bank maintains a prudent outlook on future rate hikes, it could provide a short-term boost to the GBP/USD pair. Conversely, if the BoE expresses concerns about economic prospects and hints at further easing, the currency could weaken.
What to Expect from the BoE Moving Forward?
The BoE is likely to maintain a steady hand as it navigates through the current economic challenges. Analysts expect the bank to announce a reduction in gilt holdings by £100 billion over the next 12 months. This move would reduce the need for active sales and could offer some fiscal relief ahead of the Autumn Statement.
Althea Spinozzi, Head of Fixed Income Strategy at Saxo Bank, noted, “The BoE is expected to keep rates steady in September, reflecting a cautious approach due to persistent inflation, especially in services, and elevated wage growth.” This cautious approach is expected to continue until there is more clarity on the inflationary outlook and the overall economic conditions.
Technical Outlook for GBP/USD
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlighted that the GBP/USD pair has recently settled above the falling trendline resistance on the daily chart at 1.3199. The 14-day Relative Strength Index (RSI) remains above 50, suggesting that upside risks are still intact in the near term. However, a sustained move above the 1.3250 psychological level is needed to confirm further gains.
Conclusion
The BoE's cautious approach to rate hikes reflects the ongoing uncertainty surrounding inflation and economic growth. With the Pound Sterling poised for potential volatility, market participants will closely monitor the central bank’s language for any hints on the future path of monetary policy.
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