The Bank of England looks poised to keep interest rates on hold amid persistent price pressures

• The Bank of England is set to hold its interest rate at 5.0% on Thursday.
• UK annual inflation was steady at 2.2% in August.
• BoE policy announcements are likely to shake the pound.

After a tight call in August, the Bank of England’s (BoE) September interest rate decision is eagerly awaited for further clues on the bank’s future policy action and the pace of its bond sales.

Thursday’s meeting is not a ‘Super Thursday’ – there will be no Monetary Policy Report (MPR) or Governor Andrew Bailey’s press conference – but the announcements from the central bank of the United Kingdom (UK) at 11am: 00 GMT will have a significant impact on the performance of the British Pound (GBP).

What to expect from the Bank of England’s policy announcements?

The Bank of England is expected to keep the key interest rate at 5.0% after its September policy meeting, with the main focus on the language in the policy statement and the composition of Monetary Policy Committee (MPC) votes.

The BoE is seen maintaining its cautious stance on easing amid high UK services inflation as it awaits the autumn budget from the new Labor government on 30 October. No new economic forecast could deter the central bank from engaging in any way. forward guidance.

In August, the BoE cut its key policy rate by 25 basis points (bps) to 5.0% from 5.25%, with the MPC voting 5-4 in favor of such a move. Chief economist Huw Pill preferred to keep the rate at 5.25%.

Jonathan Haskel, another MPC member, voted to keep rates on hold in August but has since been replaced by Alan Taylor. Markets are uncertain about Taylor’s policy stance, expecting him to go with the majority during his first rate-setting meeting.

August inflation data released on Wednesday showed that the Consumer Price Index (CPI) rose at an annual pace of 2.2%, remaining above the BoE’s 2.0% target, while falling short of the central bank’s expectations of 2.4% in the reported period. However, the return of UK services inflation to 5.6% in August from 5.2% in July remains a cause for concern, adding to the chances that the BoE will maintain its cautious outlook on the policy path.

Adding to this, Althea Spinozzi, Head of Fixed Income Strategy at Saxo Bank, said: “while wages growth surprised on the downside, with 3-month average weekly gains at 4% (down from 4.5%) , this remains significantly higher than pre-pandemic levels. This keeps real disposable income high compared to the 2010-2020 average, adding to the inflationary backdrop.”

Forecasting the BoE’s policy decision, Althea noted: “The Bank of England is expected to keep rates steady in September, reflecting a cautious approach due to persistent inflation, particularly in the services sector, and high wage growth.”

“The BoE is likely to announce a further £100bn reduction in gold holdings over the next twelve months, reducing the need for active selling, which could provide a tax break for the government in light of the Autumn Statement,” he she added.

How will BoE decision affect GBP/USD interest rate?

Sterling has entered a consolidation phase against the US dollar after testing bids above the 1.3200 mark earlier this week. Will BoE policy verdict revive GBP/USD uptrend?

If the BoE’s communication suggests the bank’s caution on the upcoming easing cycle, markets would perceive this as hawkish restraint, providing further impetus to sterling. In such a case, GBP/USD could extend higher towards the 1.3300 mark. Alternatively, if the central bank recognizes progress in the disinflationary trend and expresses concern about the economic outlook, it could fuel expectations for further rate cuts this year, pulling the pair back towards 1.3000.

Dhwani Mehta, Lead Asia Analyst at FXStreet, provides a brief technical outlook for GBP/USD:

“The GBP/USD pair settled above the downtrend line resistance on the daily chart at 1.3199 on Wednesday, producing a technical breakout. The 14-day Relative Strength Index (RSI) is holding comfortably above the 50 level, currently near 60, suggesting upside risks remain intact in the near term.

“Buyers, however, need to find a strong support above the psychological level of 1.3250 to take an advantage. The next upper barriers are seen at the multi-year high of 1.3297 and 1.3350. Alternatively, support below the 21-day simple moving average (SMA) at 1.3153 is critical for a sustained correction. Further down, the July 17 high of 1.3045 will come to the pound’s rescue if the decline extends. At that level, the 50-day SMA remains around,” adds Dhwani.