Investing.com — Sterling traded modestly higher against the dollar on Thursday after the Bank of England kept rates unchanged, with Governor Andrew Bailey stressing that the decision to hold was an “active” one while leaving the door open to further tightening should energy-driven inflation persist.
As of 09:10 ET (13:10 GMT), GBP/USD rose 0.33% to 1.3516, holding near the upper end of recent ranges as markets digested the Bank’s cautious but flexible policy stance, while EUR/USD was up at 0.21% to 1.1700.
According to analysts at ING, broader FX dynamics remain dominated by external drivers, particularly energy prices and global risk sentiment, with elevated oil prices and geopolitical tensions continuing to lend support to the dollar and cap more sustained upside in sterling.
The BoE held its policy rate at 3.75%, in line with expectations, but outlined multiple scenarios tied to the evolving Middle East conflict, including one that could necessitate a “forceful” increase in borrowing costs if energy prices remain elevated for a prolonged period.
Bailey pushed back against any interpretation that the hold signalled an imminent shift higher in rates, emphasising that policymakers are not sending a “clandestine message” of tightening. Instead, he characterised the move as a deliberate pause amid heightened uncertainty, noting that there remains “a good deal of space” to respond to inflation pressures if required.
Still, the Bank acknowledged that risks are skewed to the upside. A sustained spike in energy prices, linked to tensions around the Strait of Hormuz, could push inflation higher and warrant a renewed tightening cycle.
Bailey also warned against waiting for second-round effects, such as wage-price dynamics, to fully materialise before acting, suggesting the Bank retains a tightening bias under adverse scenarios.
On inflation dynamics, the BoE highlighted that indirect effects from higher energy costs are likely to be most pronounced in food prices, given the sector’s energy intensity.
At the same time, policymakers flagged the risk that elevated inflation expectations could feed into wage negotiations, reinforcing broader price pressures over time.
ING also notes that markets may be overpricing the extent of Bank of England tightening relative to peers, particularly the European Central Bank, a dynamic that could leave sterling exposed to some repricing if incoming data or central bank communication fails to validate those expectations.
However, Bailey stressed that uncertainty remains exceptionally high, particularly around the duration and magnitude of the energy shock, as well as the lagged nature of wage-setting cycles, complicating the policy response.
