BoE expected to stay put as traders look for clues over further interest-rate cuts in 2025

• 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.”