The British pound traded just below $1.34, hovering near its weakest level since late July, after the Bank of England left interest rates unchanged at 3.75% in a 6–3 vote. The central bank cautioned that borrowing costs may still need to rise if inflationary pressures intensify as a result of the conflict in the Middle East.
In prepared remarks, Governor Andrew Bailey noted that the global energy shock has so far had only a limited impact on UK prices and wages. However, he warned that prolonged volatility in energy markets could place greater upward pressure on inflation and increase the likelihood of a rate hike.
The Monetary Policy Committee also voted unanimously to reduce the Bank’s stock of UK government bond purchases to zero through a multi-year runoff programme, with an average annual pace of £46 billion through 2034. This is slower than previously planned and below the £50 billion reduction expected by markets.
The BoE now projects that inflation will rise to about twice its 2% target early next year, while it has upgraded its forecast for third-quarter GDP growth to 0.4%.
Elsewhere, the US Federal Reserve raised interest rates by 25 basis points yesterday and signaled that a further increase is likely later this year.
