BoE interest rate expected to remain unchanged at 3.75% as markets look for policy clues

• The Bank of England is expected to hold the interest rate at 3.75% for a fifth straight meeting on ‘Super Thursday’.
• All eyes are on the BoE Monetary Policy Report, the MPC vote split and Governor Bailey’s words.
• The British Pound’s next directional move hinges on the BoE event risk.

The Bank of England (BoE) is on track to keep the benchmark Bank Rate steady at 3.75% for the fifth straight meeting on Thursday, despite the renewed surge in Oil prices in July and a leadership change in the United Kingdom (UK).

With no rate change decision widely expected, the Monetary Policy Committee (MPC) policymakers are seen voting 7-2 to leave rates unchanged at the July monetary policy meeting, the same as that seen in June.

Since it’s a “Super Thursday”, the Monetary Policy Report (MPR) and the Minutes of the meeting due to be published alongside the policy statement at 11:00 GMT will be closely scrutinised for fresh policy cues. BoE Governor Andrew Bailey’s press conference will follow at 11:30 GMT.

The British Pound’s (GBP) next directional move will likely be driven by the UK central bank’s policy announcements.

Will the Bank of England keep the door open to a rate hike later this year?

Back in June, the BoE decided to stand pat on rates after United States (US) President Donald Trump signed a deal with Iran to end the Middle East conflict, a development that Governor Andrew Bailey said he was "very encouraged" by but that would not stop British inflation from rising further.

Subsequently, data released by the Office for National Statistics (ONS) showed that the UK annual Consumer Price Index (CPI) inflation eased to 2.6% in June, down from 2.8% in May and below market expectations of 2.7%. The slowdown in inflation was mainly due to a brief de-escalation in the Iran war, which reduced fuel prices throughout June.

Meanwhile, the UK labor market offered mixed signals, with the Unemployment Rate remaining unchanged at 4.9% in the three months to May, compared to an uptick to 5% expected, and annual Average Earnings including Bonuses slowing to 4.3% compared to an increase to 4.5% expected. 

This combination could ease pressure on the BoE to hike rates in the coming months.

However, the resumption of hostilities in the Gulf earlier in July reignited inflation concerns worldwide as Brent Oil prices rallied back to the $100 mark.

Against prospects of inflation staying firmly above the central bank's 2.0% target, signs of a cooling economy and a tough fiscal path ahead for Britain’s new Prime Minister (PM) Andy Burnham, the BoE is expected to stick to its wait-and-see rhetoric at this week’s policy announcement.

The latest Reuters survey showed a firm majority of respondents (58 of 70) saw the Bank ⁠Rate at 3.75% through 2026. Meanwhile, “the swaps curve implies 75 basis points (bps) of tightening to 4.50% in the next twelve months,” according to analysts at BBH. This highlights the divergence between economists' expectations and current market pricing.

That being said, the BoE’s updated inflation and growth projections in the Monetary Policy Report could also hint at a possibility of a rate hike late this year, especially as inflation risks remain elevated.

How will the BoE interest rate decision impact GBP/USD?

The GBP remains under pressure near 4-week lows around 1.3300 against the US Dollar (USD) amid guarded optimism following the latest pause in the strikes between the US and Iran.

If the BoE maintains its cautious tone and Governor Bailey offers little indication of tightening, while the MPC vote split meets expectations, the British Pound could come under renewed selling pressure. In that scenario, GBP/USD may turn lower toward the 1.3250 area.

On the other hand, if the BoE emphasizes persistent inflation risks, revises its inflation forecasts higher, and signals that a rate hike remains a realistic possibility later this year, Sterling could reignite a recovery rally. A vote-split showing more than two policymakers favoring a rate hike could revive rate hike bets for this year, potentially lifting GBP/USD toward the 1.3500 psychological level.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for GBP/USD: 

“The pair is keeping a bearish near-term bias as it holds below the 50-day, 21-day, 100-day and 200-day simple moving averages (SMAs) clustered between roughly 1.3360 and 1.3400. The 14-day Relative Strength Index (RSI) around 43 suggests soft, but not extreme, downside momentum, hinting that GBP/USD remains a ‘sell-the-rally’ trade on the daily chart.”

On the topside, initial resistance appears at the 50-day SMA near 1.3362, followed by the 21-day SMA at 1.3373, with the broader bearish cap reinforced near 1.3400, the confluence of the 100-day and 200-day SMAs. Conversely, the initial downside could be supported by the 1.3250 psychological level, below which a fresh downtrend could initiate toward the June 24 low of 1.3140,” Dhwani adds. 

BoE expectations diverge as Societe Generale questions aggressive OIS pricing

Strategists at Societe Generale maintain that “our base case remains for the policy to stay on hold through 2026,” though they caution that “a risk of higher rates [is] not ruled out depending on how the conflict evolves in the Gulf.” Against that backdrop, they highlight a disconnect between market pricing and their assessment of current conditions, noting that “the OIS curve is pricing around 40bp by year-end which is aggressive considering that policy is mildly restrictive and the labour market is loosening.”