The Bank of England (BoE) is poised to cut its policy interest rate by 25 basis points at its upcoming meeting on Thursday, as inflation in the UK continues to ease, signaling a shift in monetary policy. This move follows months of tightening as the BoE battles persistent inflation, and analysts believe the decision will be the first step in a more dovish stance by the central bank.
Easing Inflation Opens the Door for Rate Cuts
In September, the UK’s inflation rate showed signs of disinflationary pressure, as the headline Consumer Price Index (CPI) fell to 1.7% year-over-year, marking a noticeable decline from previous months. The core CPI, which excludes volatile food and energy prices, also eased to 3.2%. Despite the overall slowdown in inflation, services inflation remained a concern, staying elevated at 4.9%. However, these figures are still seen as enough to give the BoE room to act.
The UK economy has shown signs of cooling, with growth data coming in softer than expected, particularly in the third quarter. This trend has led many analysts to anticipate a 25-basis-point rate cut, a move that would take the BoE’s benchmark rate from 5.00% to 4.75%. The BoE has been cautious in its approach, opting for smaller, incremental cuts rather than a rapid loosening of monetary policy. In their September meeting, policymakers emphasized the need to remain restrictive due to persistent inflationary pressures, but with inflation now easing, there is growing consensus that a rate cut is warranted.
The Impact on GBP/USD and Market Expectations
As investors await the decision, the British Pound (GBP) is showing signs of volatility. On Wednesday, GBP/USD hit a low near 1.2833, with analysts eyeing a crucial support level around the 200-day Simple Moving Average (SMA) at 1.2810. A potential rate cut could further pressure the Pound, sending the currency lower if it breaks below this level. In such a case, the next significant support would be the July low at 1.2615.
However, the outlook for GBP/USD isn’t all bearish. On the upside, if the Pound finds support and the rate cut causes a market shift, traders will look for a potential rebound toward the 55-day SMA at 1.3119. A breakout above this level could bring the 2024 peak at 1.3434 back into play, reversing some of the recent downward momentum.
Also read : Bank Of England Set For 25bps Rate Cut- What It Means For GBP/USD, Key Support At 1.2811
A Cautious Path Forward
While a 25bps rate cut is largely expected, the BoE’s future actions remain uncertain. In recent statements, BoE officials have suggested that the central bank will take a gradual approach to cutting rates, particularly if inflation continues to trend downwards. Chief Economist Huw Pill has emphasized the importance of maintaining a cautious stance to ensure that inflation doesn’t reaccelerate.
The market will be watching closely for any additional guidance from BoE Governor Andrew Bailey and other policymakers during the post-decision press conference. Any hints about future rate cuts or shifts in the BoE’s approach to quantitative tightening could move markets.
As the BoE navigates this delicate balance between controlling inflation and supporting economic growth, the outcome of this week’s decision will provide important clues about the UK’s economic outlook in the months ahead.
