**BOE Holds Rates Steady in Close 5-4 Vote Split, GBP/USD Continues Rally**
*By Kenny Fisher, originally published on MarketPulse*
On a highly anticipated day for the British pound and the broader financial markets, the Bank of England (BOE) opted to maintain its benchmark interest rate at 5.25% for the seventh consecutive meeting. The decision, released on June 20, 2024, was closer than many in the market expected, with a narrow 5-4 split among the nine-member Monetary Policy Committee (MPC). The outcome underscores the fine balance between concerns about lingering inflationary pressures and the prospects for future rate cuts as the UK economy navigates through persistent uncertainty.
**BOE’s Balanced Approach: Key Decision Highlights**
– **Interest Rate Unchanged at 5.25%**: The BOE kept rates at their current 16-year high, citing the need for greater evidence that inflation is firmly on track toward its 2% target.
– **Close 5-4 Split in Voting**: Four policymakers (Swati Dhingra, Megan Greene, Jonathan Haskel, and Catherine Mann) voted to keep rates unchanged, while the other five, including Governor Andrew Bailey, expressed more openness to future cuts if data permits.
– **Continued GBP/USD Rally**: The British pound initially slipped after the decision but then managed to rally, reflecting renewed optimism and recalibration in rate-cut expectations.
**Current Economic Backdrop**
The BOE’s decision takes place against a backdrop of evolving macroeconomic data and shifting political landscapes. UK inflation is moving downward but remains sticky in several components of the consumer basket, especially in the services sector.
– **May Headline Inflation**: Fell sharply to the BOE’s 2% target for the first time since July 2021, but many core and services measures remain elevated.
– **Services inflation**: Now stands at 5.7%, only modestly lower than previous months, and far above what the BOE would consider comfortable.
– **Wage growth**: Remains uncomfortably brisk even as broader price rises slow, keeping the central bank wary of declaring victory over inflation.
For investors, traders, and policymakers alike, this fine balance is critical: on one hand, the disinflation process is making steady progress; on the other, domestic price pressures and a tight labor market risk reigniting a second wave of inflation.
**Money Markets Recalibrate BOE Outlook**
Immediately after the BOE released its statement and meeting notes, money markets reevaluated their expectations:
– **First full 25 basis point rate cut priced in for September**: Markets now see a 60% chance of a move at the next meeting instead of full certainty.
– **Only one rate cut fully priced in for 2024**: Down from as many as three projected earlier in the year.
The dovish tilt of the vote split was the key surprise. With four members opting for a hold and another five suggesting that, should positive inflation data continue, a cut could be warranted soon, traders reassessed the probability and timing of future easing cycles.
**GBP/USD Trading Reaction: Sterling Holds Firm**
The initial reaction in the currency market was classic for such an event: GBP/USD dropped after the hold was announced, with some hoping for more explicit guidance on a near-term rate cut. However, as traders digested the closely split vote and comments from Governor Bailey, the pound reversed direction and found renewed strength.
Key trading dynamics observed post-decision:
– **GBP/USD rallied sharply to 1.2720**: The rally was reinforced by market positioning adjustment, as the rate decision ran counter to more dovish expectations fueled by recent UK and global data.
– **Technical momentum**: On the daily charts, GBP/USD rebounded off support near 1.2650, a level that has acted as a springboard for sterling bulls several times
Read more on GBP/USD trading.