Pound firmer after BoE rate decision
Sterling has gained ground following yesterday’s Bank of England (BoE) interest rate decision. As widely anticipated the BoE lowered rates by 25bps to 4%, but the vote to do so (5/4) was much more finely balanced than expected. Moreover, BoE Governor Bailey said that, while the direction for rates was still “downward”, the timing and scale of further reductions was “uncertain” given a “slight increase” in upside risks to the inflation outlook. The pound is trading at around £0.8670 and $1.3440 against the euro and dollar this morning, up about half a penny and half a cent respectively from before the rate announcement. The euro fluctuated between $1.16 and $1.17 against the dollar during yesterday’s session and is currently trading at around $1.1650.
UK government bonds underperformed (albeit modestly so) in response to the BoE rate decision, with 2- yields rising by 6bps, as the market pared back the chances of another cut before the end of this year. Indeed a full 25bps reduction in rates is now not priced until the February 2026 meeting. Elsewhere in bond markets, German yields were flat to slightly lower on the day while US yields ended marginally higher. In equity markets, UK stocks underperformed, shedding around 0.7%, while European stocks added almost 1.5%. US indices were mixed, with the Nasdaq gaining 0.4% but the S&P 500 ending a touch lower.
The BoE in its latest projections has raised its forecast for UK inflation, which is now expected to rise to 4% in September (from 3.6% in June) before falling back to 2.5% by the end of next year and to the 2% target in the middle of 2027, while its forecasts for GDP growth were largely unchanged with the economy expected to expand by not much more than 1% a year over the period 2025-2027. The BoE judges the risk to inflation to be on the upside, but sees downside risks to the growth outlook, hence its uncertainty about the extent of further rate cuts.
For the day ahead, it is extremely quiet in terms of economic data, with little or nothing of note due, so markets will have look elsewhere for inspiration!