The Bank of England reduced interest rates by 25 basis points to 4% on August 7. A 5-4 vote in favor of cutting rates reflected a divided Monetary Policy Committee, likely increasing focus on inflation.
The next UK CPI report, out on August 20, will likely dictate near-term bets on further BoE rate cuts. Economists forecast the annual inflation rate to rise from 3.6% in June to 4% in July. The BoE may be reluctant to cut rates if inflation climbs higher, pushing back a potential rate cut to November or possibly December.
ING Economics signaled a November BoE rate cut, stating:
“We still think the Bank’s concerns about inflation will prove overblown. There’s no reason in and of itself that inflation will become more entrenched, simply because headline CPI is sitting above target. It relies on workers being able to chase higher wages, as they bid to retain purchasing power.”
However, ING Economics warned:
“We’re sticking to our call, but were the next couple of inflation reports to surprise to the upside, or if the recent falls in private-sector employment start to ease off, then we’ll be rethinking.”
GBP/USD Reaction to the Q2 GDP Report
Before the UK GDP Report, the GBP/USD fell to a low of $1.35639 before climbing to a high of $1.35919.
However, in response to the report, the GBP/USD briefly tumbled to a low of $1.35685 before rising to a high of $1.35858 amid easing bets on a September BoE rate cut.
On Friday, August 14, the GBP/USD was up 0.05% to $1.35806.
