BoE likely to pause interest rates after August cut to 4%

• The Bank of England is set to hold the benchmark interest rate at 4.0% on Thursday, following the August cut.
• The United Kingdom's annual CPI inflation held in August at the highest level since January 2024.
• The Pound Sterling could experience intense volatility on BoE monetary policy announcements.

After delivering a 25 basis points (bps) interest rate cut to 4% in August, the Bank of England (BoE) is widely expected to stand pat following the conclusion of the September monetary policy meeting. The Monetary Policy Committee (MPC) policymakers are seen voting 7-2 to keep rates on hold.

Thursday's meeting is not a "Super Thursday" - there won't be any Monetary Policy Report (MPR) or a press conference from Governor Andrew Bailey - but the United Kingdom (UK) central bank's policy announcements at 11:00 GMT are likely to inject massive volatility in the Pound Sterling (GBP).

What to expect from the Bank of England policy announcements?

With a steady rate decision fully baked in, the key focus will likely remain on any tweaks to the policy statement and a potential split in the MPC voting composition.

At its August monetary policy meeting, the BoE lowered the benchmark rate to 4%, but after an unprecedented second round of voting that ended with a 5-4 split in favor of such a move.

The central bank repeated its guidance about "a gradual and careful approach" to further cuts in borrowing costs but added that "the restrictiveness of monetary policy had fallen as Bank Rate had been reduced."

A strong majority of the economists polled by Reuters pencilled in a 25 bps cut next quarter, with increased bets that it will happen in November. Slowing services inflation and jobs growth in the UK could persuade the BoE to hint at a rate cut in November.

However, with Britain having the highest inflation rate in the Group of Seven (G7) advanced economies, the central bank could very well stick to its cautious rhetoric on further policy easing, 

The UK's Office for National Statistics (ONS) showed on Wednesday that the annual Consumer Price Index (CPI) rose by 3.8% in August, missing the estimates for a 3.9% growth. The reading stayed at the highest level since January 2024 and was well above the Bank of England's 2% inflation target. However, services inflation declined to 4.7% in August from July's 5%.

Meanwhile, the UK labor data published on Tuesday highlighted that the annual growth in Average Earnings Excluding Bonus slowed to 4.8% in the three months to July from 5% previously, while the Unemployment Rate remained unchanged at 4.7%, both readings matching the analysts' estimates.

Previewing the BoE monetary policy decision, Societe Generale said in a research note: "On Thursday, the Bank of England is widely expected to keep the policy rate on hold at 4.00% and reiterate its guidance for 'a gradual and careful approach' to further rate cuts. We see a vote split of 7-2 in favor of steady rates, with the dissenters supporting a 25 bps cut (Taylor and Dhingra)."

"The BoE will also announce the pace at which it will shrink its bond holdings over the next 12 months. Market participants estimate the new gilt runoff pace to slow from currently £100bn (between October 2024 and September 2025) to £60bn-£75bn (between October 2025 and September 2026)," analysts at Societe Generale added.

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

The GBP consolidates near two-month highs below 1.3700 against the US Dollar (USD). Will the BoE's monetary policy outcome revive the GBP/USD uptrend?

If the monetary policy statement reemphasizes the bank's prudence on further rate cuts, markets would read that as a hawkish hold, which could provide an extra boost to the Pound Sterling's upbeat momentum. In such a case, GBP/USD could extend the uptrend toward the 1.3900 mark.

Contrarily, the GBP could witness a fresh sell-off, initiating a GBP/USD correction should the central bank express concerns over the economic prospects amid potential upside risks to inflation and cooling labor market conditions. This scenario could seal in a November rate cut, dragging the pair back toward 1.3500.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for GBP/USD: 

"The GBP/USD pair remains in a correction phase from over two-month highs of 1.3726 early Thursday. The 14-day Relative Strength Index (RSI) remains comfortably above the 50 level, currently near 60.40, suggesting that upside risks remain intact in the near term."

"Buyers, however, need to see acceptance above the 1.3700 psychological level for a sustained uptrend. The next topside barriers are seen at the previous day's high of 1.3726 and the July high of 1.3789. On the downside, the 1.3550 mark could offer immediate support. Further south, the 21-day Simple Moving Average (SMA) at 1.3520 will come to the rescue of Pound Sterling buyers. A deeper decline could threaten the confluence support of the 50-and the 100-day SMAs at around 1.3475.", Dhwani adds.