Bank of England: Pound Sterling Higher vs Euro, Dollar as UK Interest Rates Cut

November 8, 2024 - Written by David Woodsmith

STORY LINK Bank of England: Pound Sterling Higher vs Euro, Dollar as UK Interest Rates Cut

The BoE curt rates by 25bps. This was expected and the pound actually rose slightly against the euro.

The budget seems to have tempered the bank’s plans to shift more dovish and get “more aggressive” with rate cuts as Governor Bailey suggested they might last month.

Markets only expect 3 more cuts. This is bullish for the pound but might be too hawkish as it would leave UK rates much higher than the rates in the EU and US.

Markets have settled down from Wednesday’s volatile session in the wake of the US election. Indeed, some of the moves have partially unwound and the US dollar has given back some of its gains. EURUSD is +0. 6%, GBPUSD is +0.7% and AUDUSD is leading with a gain of +1.4%. Commodities are also reversing Wednesday’s moves as gold, silver and copper are all higher. The FOMC meeting is due later in the session and the Fed are almost certain to deliver a 25bps cut.

Earlier in the session the BoE cut rates 25bps as widely expected. The reaction in the pound was mild and EURGBP fell slight by around –0.1% to 0.832. Arguably, the main talking point was not the cut itself, but the bank’s comments on the UK budget.

Sterling Unmoved as the BoE Cuts

The BoE cut rates by 25bps for the second time this year, taking UK interest rates to 4.75%. This was widely anticipated and already priced in by markets, hence the small reaction in sterling.

The focus was less on the cut and more on the bank’s future plans for monetary policy, especially in light of the budget which increased spending plans and led to higher yields. The assumption is that higher spending by the government will be inflationary and boost UK growth. That could limit the BoE’s rate cuts.

The BoE pushed back on that view, however. As ING noted,

“... the overarching message from the Bank today is that while the budget will have some impact, it is just one of a number of factors affecting the inflation outlook right now.”

In other words, it has not led to a radical re-think and the path for rates will depend on data.

That said, the budget may have factored in to the bank’s rather neutral stance on Thursday. It was assumed that the recent drop in inflation might pave the way for the “more aggressive” approach to rate cuts as Govenor Bailey hinted at in October. Services inflation finally fell below 5.0% and is quite significantly below the bank’s own forecasts. If it were not for the budget, the bank would have likely sent a firmer signal about cutting in December.

As things currently stand, a December cut is far from certain and ING think the BoE may hold rates steady.

“A December rate cut, we think, now looks unlikely. Previously we’d thought that the Bank would accelerate its cutting cycle beyond today, but uncertainty surrounding the budget’s impact has changed our mind on that.”

This is good news for the pound and it remains the best preforming G7 currency in 2024. However, it also means there is a risk that the market is assuming an overly hawkish path for rates. Only 3 more cuts are priced in. Will the BoE really stop at 4% when the neutral rate is expected to be nearer 3%? After all, the Fed are aiming for around 3% and the ECB could end up with a terminal rate nearer 2%.

It may only take a few weak data readings for more cuts to be priced in. Indeed, if the UK were to face a growth scare like the US did in late July/early August, 3-4 more rate cuts could quite quickly be priced in. This would certainly hurt sterling exchange rates.

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TAGS: Pound Sterling Forecasts