(Bloomberg) — The pound rose as traders placed bets on further monetary policy easing from the Bank of England, with the prospect of price pressure clouded by increased British government spending.
Sterling rose 0.4% to $1.2935 on Thursday after officials voted to cut interest rates by a quarter point as expected. Officials said borrowing costs are likely to continue to decline gradually if the economy develops as expected, confirming market pricing that this was the last rate cut in 2024.
The BOE warned that additional spending announced by the new UK government last week will push up inflation by as much as half a percentage point. Governor Andrew Bailey is likely to be pressed about how the budget affects the outlook for monetary policy.
“The pace of cuts from here has been weakened by recent political developments,” said Zara Nokes, global market analyst at JP Morgan Asset Management. “The UK economy is now grappling with a number of cross-currents which make the outlook for growth and inflation very uncertain.”
Markets are now pricing in about a 15% chance of another quarter-point cut in December, up from 25% before the decision. Further ahead, swaps involve two more cuts in 2025 with a 50% chance of a third. It is less than what is expected by the European Central Bank and the Federal Reserve.
Bailey and his colleagues are likely to be asked at a press conference how Donald Trump’s victory in the US election could affect the UK economy. The BOE’s decision also comes ahead of a Fed announcement later Thursday, where officials are expected to cut borrowing costs by 25 basis points.
“The pound should get a little boost, more so at the junctions,” said Neil Jones, managing director at TJM Europe. “The BOE is showing an awareness of inflation upside on the budget. They clearly have not yet factored in the Trump effect.”
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