BoE keeps rates unchanged and issues a dovish statement, thereby weakening the GBP⬇️

The pound sterling weakened following the Bank of England’s (BoE) decision to keep its key interest rate at 3.75%. Despite a hawkish vote split (6-3, with three members favoring a rate hike, as expected), investors focused on the dovish statements and scaled back their bets on further monetary tightening to just 38 basis points by year-end.

Key takeaways from the meeting:

• Interest rate ceiling: Although three policymakers voted for a rate hike, the market took Martin Taylor’s remarks to heart—that policy is already “restrictive.” The BoE also reiterated that there is still a lack of strong evidence of second-round effects on inflation, which weakened the bulls’ case for the pound.

• Geopolitics and Inflation: The BoE has revised its inflation forecast upward—inflation is now expected to reach 3.75% by the end of 2026 and slightly above 4% in the first quarter of 2027. Governor Andrew Bailey warned that a protracted conflict in the Middle East could force a tightening of monetary policy, but this contingent scenario was not enough to support the currency in the here and now.

• The Bank of England’s monetary policy statement reiterated the July assessment that “so far, there is little evidence” of significant second-round inflationary effects

• Gradual balance sheet reduction (QT): The long-term plan to reduce the bond portfolio by 368 billion GBP by 2034 has proven to be very conservative. Active sales will amount to only 20 billion GBP per year, with the remainder consisting of securities held to maturity (or used to back cash). The absence of an aggressive sell-off has calmed the British debt market.

• Better growth prospects: The BoE slightly revised its GDP forecast for the third quarter upward (to 0.4% from 0.1%), but this took a back seat to expectations regarding future interest rates.

The decision and the vote were 100% in line with expectations, and the balanced statement, combined with the conviction among some committee members that the policy was sufficiently restrictive, triggered a classic “sell-the-fact” reaction in the pound.

Investors are scaling back their expectations regarding Bank of England interest rates, pricing in hikes of 38 basis points by the end of the year. As a result, the pound is losing ground. Source: XTB