GBP/CAD firms as BoE delivers a cautious rate cut

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The British Pound (GBP) edges higher against the Canadian Dollar (CAD) on Wednesday, reversing earlier losses as markets digest the Bank of England’s (BoE) latest monetary policy decision. At the time of writing, GBP/CAD trades near 1.8478, rebounding from a daily low around 1.8384.

GBP/CAD edges higher after the BoE delivers a widely expected rate cut.
BoE flags a measured pace of easing, warning next steps are a closer call.
Traders trim BoE rate-cut bets, offering modest support to the Pound.

The BoE cut the Bank Rate by 25 basis points to 3.75%, marking its lowest level since 2022. While the move itself was widely anticipated, investors focused on the narrow 5-4 vote split, with four policymakers opting to keep rates unchanged at 4.00%, highlighting growing divisions within the Monetary Policy Committee (MPC)over the pace of easing.

Explaining the decision, the BoE noted that CPI inflation has fallen to 3.2% since the previous meeting and, while still above the 2% target, is now expected to move closer to target more quickly in the near term. Policymakers said the extent of further easing will depend on how the inflation outlook evolves, adding that, based on current evidence, Bank Rate is likely to follow a gradual downward path, though future decisions are becoming a closer call.

BoE Governor Andrew Bailey said recent data indicate that disinflation is becoming more firmly established, with headline inflation easing from its peak and upside risks diminishing. He added that Budget measures should help bring inflation down further in the near term, while rising unemployment and underemployment point to increasing slack in the economy.

Looking ahead, Bailey said there is scope for some additional policy easing, but stressed that the future path of Bank Rate cannot be pre-judged, particularly as interest rates move closer to a neutral level.

Despite the rate cut, the BoE’s cautious tone tempered expectations for an aggressive easing cycle, helping the Pound as traders pared back rate-cut bets for next year.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.