Bank of England set to end year with another interest-rate pause

• The UK central bank is set to hold interest rate steady at 5.25% at the final meeting of 2023.
• The Bank of England could push back against expectations of aggressive rate cuts next year.
• The Pound Sterling is poised for a big reaction to the BoE policy announcements.  

In the finale of 2023, the Bank of England (BoE) is expected to keep its key interest rate unchanged for a third consecutive meeting on Thursday. The Pound Sterling (GBP) is expected to see intense volatility on the BoE policy announcements, with all eyes focusing on the United Kingdom’s (UK) central bank’s communication about the path forward on the interest rate as markets price in rate cuts in 2024.

Bank of England to extend pause into third meeting

The Bank of England is widely expected to hold the benchmark interest rate steady at 5.25% when it announces its decision at 12:00 GMT on Thursday. It’s not a “Super Thursday” as there will be no Monetary Policy Report (MPR) published nor Governor Andrew Bailey’s press conference.

With a no rate hike fully baked in this week, markets are now pricing 10% odds of a cut for the March 21 meeting, rising to nearly 45% for May 9 and nearly 90% for June 20, according to Bloomberg’s World Interest Rate Probability (WIRP).

Therefore, the language in the BoE’s policy statement is critical to gauging the interest rate outlook for next year as to when and how fast the UK central bank will cut rates. Economists and industry analysts expect the BoE to push back against expectations around rate cuts next year, especially after BoE policymakers continued to maintain a hawkish tone in their recent speeches.

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.” Joining the chorus, BoE policymaker Catherine Mann noted that “the prospects for more persistent inflation imply a need for tighter monetary policy.” Meanwhile, BoE Governor Andrew Bailey reiterated earlier this month that interest rates are likely to need to remain around current levels.

Rabobank’s macro strategists project the first reduction in the UK’s bank rate to take place in November 2024. “We believe the MPC will want to see compelling evidence that labor market conditions have eased in a meaningful way and that domestically generated inflation pressures have clearly cooled before starting to loosen their policy stance,” they said.

Data published by the Office for National Statistics (ONS) on Tuesday showed that the UK’s wage growth slowed in the quarter to October. However, pay growth continued to increase at a quick pace, something that could dissuade the BoE from cutting rates anytime soon.

Average Earnings excluding Bonus in the UK rose 7.3% 3M YoY in October versus September’s 7.8% increase and below 7.4% expected. Additionally, services inflation also remains very high, at 6.6%.

Meanwhile, UK economy shrank by more than expected 0.3% in October, as higher interest rates continue to squeeze household spending, the ONS data showed on Wednesday. The data, however, is unlikely to lead the BoE to signal that it is close to cutting rates, yet.

How will the BoE interest rate decision affect GBP/USD?

If the Bank of England shifts gear toward a dovish tone, acknowledging the gloomy economic outlook, GBP/USD could come under intense selling pressure. Further, a dovish vote split could also weigh on the Pound Sterling, as it would add credence to the current market pricing of rate cuts next year. Conversely, the pair’s recovery could gain momentum should the BoE stick to its hawkish rhetoric, supporting the narrative of a “higher for longer” view on interest rates.  

At its November meeting, policymakers voted 6-3 in favor of the extended pause decision. Megan Greene, Jonathan Haskel and Catherine Mann voted to raise rates by 25 basis points (bps).

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the major and explains: “Having found support once again at the critical 200-day Simple Moving Average (SMA) at 1.2495, GBP/USD is extending the recovery momentum. The-day Relative Strength Index (RSI) remains positioned in the bullish territory, implying more gains in the offing.”

Dhwani also outlines important technical levels to trade the GBP/USD pair: “On the upside, Pound Sterling buyers could target the static resistance near 1.2730 on a hawkish BoE pause, above which the next barrier is seen at the 1.2800 round level. Conversely, the immediate support aligns at the 21-day SMA at 1.2581, below which a test of the 200-day SMA at 1.2495 will be inevitable.”