The Bank of England’s (BoE) 25bp rate cut to 3.75% came with a cautious message, limiting dovish surprise and offering modest support to sterling despite slowing growth and still-elevated inflation, Commerzbank's FX analyst Norman Liebke notes.

Bailey signals caution on further easing

"Yesterday, the Bank of England cut its policy rate by 25 basis points to 3.75% for the fourth and final time this year. The decision-makers voted 5-4 (the decisive vote came from BoE Governor Andrew Bailey). Bailey emphasized that, based on current data, the key interest rate is likely to continue to fall gradually, but that the decision on further monetary easing will become more difficult. Overall, interest rates are now 150 basis points lower than their peak in August 2023."

"Inflation in the UK has also fallen significantly to 3.2% since its peak in October 2022 (11.1%), but the Bank of England has so far been unable to bring inflation down to its 2% target on a permanent basis. The big question is how many interest rate cuts are still on the table. On the one hand, we have a weakening economy, which tends to argue for interest rate cuts, but on the other hand, inflation remains at a high level, which makes further interest rate cuts difficult to justify. We expect another interest rate cut next year, but probably not until April."

"The actual decision can be viewed as cautiously positive for the British pound. In recent years, the Bank of England has often been good for a dovish surprise, but this time, despite the surprise downward shift in inflation and the rather weak labor market figures this week, there was no such surprise. This dilemma between high inflation and a weakening economy can be interpreted in favor of the pound, provided that interest rate cuts are made with appropriate caution."