Sterling sharpens decline to six-month lows after surprise decision by BOE

Sterling fell on Thursday after Bank of England announced a surprise pause in the cycle of rate hikes, sending the pound to six-month lows amid concerns about the interest rate gap between the US and UK.

Such a pause by the BOE was certainly possible after inflation fell to 1/15 year lows while both the Federal Reserve and Swiss National Bank paused interest rate hikes. 

The main surprise was Governor Andrew Bailey's less than bullish press conference, which hurt chances of another UK interest rate hike this year. 

GBP/USD

GBP/USD fell 0.9% to 1.2234, the lowest since March, with a session-high at 1.2347, after losing 0.4% yesterday, becoming the worst performing major currency after UK inflation tumbled. 

BOE

Bank of England voted to hold interest rates unchanged at 5.25%, the highest since March 2008, confounding expectations of a 0.25% hike to 5.5%.

Such a pause is the first for Bank of England since it launched the current cycle of interestt rate hikes in Decemebr 2021, in turn hurting the pound's tanding.

The BOE stated it'll continue to monitor inflation indices and economic data, adding that the policies have become tight enough to bring inflation to the 2% target. 

The BOE's press release pointed to the slowing down consumer prices and labor conditions, and weaker business sentiment as basis for the decision.

Bailey

BOE Governor Andrew Bailey asserted the bank will continue to monitor data to judge the need for another interest rate hike.

However he noted how inflation tapered off in recent months, which is a trend expected to carry on.

UK Rates

After the meeting, chances of a 0.25% interest rate by Bank of England in November tumbled to 64% from 81%.

Chances of an interest  rate cut in September, 2024 rose from 27% to 55%.