Pound Sterling has come under pressure ahead of today’s Bank of England (BoE) interest rate decision. In the last meeting of 2023, the BoE is expected to keep its key interest rate unchanged for a third meeting in a row. The pound is anticipated to be volatile when the central bank makes its announcements, with investors focusing on the central bank’s communication regarding interest rates and potential rate cuts for 2024.
Bank of England to pause for a third consecutive meeting
The Bank of England is widely expected to hold the interest rate at 5.25% when it announces its decision at 12:00 GMT on Thursday. This will not be a “Super Thursday” as there will be no Monetary Policy Report (MPR) published, nor a press conference with Governor Andrew Bailey. Markets are pricing a 10% chance of a cut for the 21st of March meeting, a 45% chance of a cut for the 9th of May and nearly 90% for the 20th of June. Investors will closely watch the language in the BoE’s policy statement to determine the interest rate outlook, and the exact timing and pace of potential rate cuts. Economists and industry analysts don’t expect the bank to be dovish and refer to rate cuts, but to maintain its hawkish tone and push back against rate cuts next year.
BoE Deputy Governor for Markets and Banking, Dave Ramsden, said that “monetary policy is likely to be needed to be restrictive for an extended period of time to get inflation back to 2% target.” BoE policymaker Catherine Mann also reiterated that “the prospects for more persistent inflation imply a need for tighter monetary policy.”
Some analysts expect the first rate cut to come in November 2024, as the Monetary Policy Committee (MPC) would need to have strong evidence that the job market conditions have eased and that domestically generated inflation has dropped before starting to loosen their policy stance.
UK economic data
On Tuesday, data from the Office for National Statistics (ONS) showed that the UK’s wage growth slowed in the quarter to October, while pay growth increased. This could deter the central bank from cutting rates anytime soon. Average Earnings excluding Bonus in the UK increased by 7.3% 3M YoY in October compared with September’s 7.8% rise and lower than the 7.4% figure that was expected. Services inflation remained elevated at 6.6%. On Wednesday, the ONS reported that the UK economy contracted 0.3% in October more than it was anticipated, as higher interest rates weighed on household spending.
How will the BoE interest rate decision influence the pound?
If the Bank of England strikes a dovish tone, stressing the gloomy economic outlook, then the pound will weaken. If the MPC, however, does not explicitly push back against the markets’ aggressive pricing for cuts, but keeps a more neutral tone, the pound could also weaken, but slightly less. A dovish vote split could also push the pound lower, but if the BoE remains hawkish emphasising that interest rates should remain “higher for longer” then the pound will strengthen. If the MPC pushes back against rate cuts by May and stresses the uncertainty regarding economic data, then the pound will find support.