BoE expected to cut interest rate to 4.0% despite rising inflation
- The Bank of England is expected to trim the benchmark interest rate to 4.0%.
- UK inflation has unexpectedly surged, while economic growth has kept shrinking.
- GBP/USD battles to extend gains beyond 1.3300, may retest August lows in the 1.3140 area.
The Bank of England (BoE) is scheduled to announce its decision on monetary policy this Thursday, and market participants anticipate a 25-basis-point (bps) interest rate cut from the current 4.25% to 4.0%. Financial markets also anticipate seven out of nine Monetary Policy Committee (MPC) members will vote for an interest rate cut versus just three voting for such a decision in the previous meeting.
The announcement will be accompanied by the meeting Minutes and the Monetary Policy Report, a quarterly release that indicates officials’ economic analysis and the MPC inflation projections, which is the base of policymakers’ decisions.
Finally, Governor Andrew Bailey will offer a press conference, in which he will explain the reasoning behind the decision and maybe offer hints about what will come next on monetary policy.
United Kingdom economic outlook: why it matters
The Bank of England left the benchmark interest rate unchanged when it met in June. However, three MPC members cited “material further loosening in the labour market”, subdued consumer demand, and pay deals near sustainable rates as a reason to trim rates.
Since then, macroeconomic data has been quite worrisome. The Gross Domestic Product (GDP) contracted 0.1% MoM in May, following a 0.3% decline in April, according to the Office for National Statistics (ONS). The report also showed that “Of the three main sectors in May 2025, production output was the largest contributor to the monthly GDP fall, decreasing by 0.9%. Construction output also decreased by 0.6%. These figures were partially offset by an increase of 0.1% in services output in May 2025.” It is worth reminding ourselves that the first estimate of the second quarter GDP will be released on August 14.
Meanwhile, inflation in the United Kingdom (UK) has risen to its highest level in over a year in June. The Consumer Price Index (CPI) was up 3.6% on a yearly basis, after posting 3.4% YoY in May. Meanwhile, the core annual CPI printed at 3.7%, up from the 3.5% posted in May. The ONS indicated that food prices rose in June by the most since February 2024, while also indicating that services inflation remains at 4.7%.
Finally, employment-related data has been less worrisome as the labor market keeps loosening. The Unemployment Rate stood at 4.7% in April, increasing from the 4.4% posted at the beginning of the year.
BoE officials will have to assess whether slowing growth or rising inflationary pressures weigh more. Nevertheless, Governor Andrew Bailey said, "I really do believe the path is downward" on interest rates in an interview with the Times.
Regarding ecocoming projections, policymakers may upwardly review inflation perspectives and downwardly review growth-related ones.
How will the BoE interest rate decision impact GBP/USD?
The MPC has no easy task, and voting will likely be split. Generally speaking, market players anticipate an interest rate cut, which will be no surprise. The split vote among MPC members could shake the Sterling Pound, alongside discouraging revisions to growth and inflation. Market players will also pay close attention to Bailey’s words. The more hawkish despite the dismal macro picture, the less likely the GBP is to fall.
Ahead of the announcement, the GBP/USD pair trades within a tight range just above the 1.3300 mark, pressuring the upper end of the range with a modest upward bias. Still, the expected BoE announcement seems more of a downward risk for the pair.
Valeria Bednarik, FXStreet Chief Analyst, notes: “The GBP/USD pair hover around its weekly peak in the 1.3330 region, without any technical sign of additional gains ahead. The daily chart shows a flat 100 Simple Moving Average (SMA) provides resistance at around 1.3350, while the 20 SMA maintains its bearish slope at around 1.3400. The pair could turn bullish once beyond the latter, an unlikely scenario with the BoE’s expected announcement.”
Bednarik adds: “On the downside, the 1.3250 area is the one to watch, as once below it GBP/USD may turn bearish. Interim support comes at 1.3200 ahead of the August monthly low at 1.3141.”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Economic Indicator
BoE Interest Rate Decision
The Bank of England (BoE) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoE is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Pound Sterling (GBP). Likewise, if the BoE adopts a dovish view on the UK economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for GBP.
Read more.Next release: Thu Aug 07, 2025 11:00
Frequency: Irregular
Consensus: 4%
Previous: 4.25%
Source: Bank of England