Sterling Falls After BoE Rate Cut and Gloomy Outlook

Sterling Falls After BoE Rate Cut and Gloomy Outlook

The Sterling faced sharp falls after the Bank of England (BoE) rate cut, delivered a bleak economic outlook. The central bank’s decision to cut interest rates and lower growth forecasts sent ripples through the forex market.

BoE Slashes Interest Rates and Growth Forecasts

The BoE announced an interest rate cut to 4.5%, a move that surprised many investors. Additionally, the central bank revised its economic growth projection for the year down to 0.75%. This significant downgrade raised concerns about the UK’s economic health.

Inflation expectations also shifted, with forecasts now indicating a peak of 3.7% within the year. These projections exceed previous estimates, adding uncertainty to the market.

Sterling’s Reaction to the BoE Decision

Following the announcement, the British pound fell by 0.8%, trading at $1.241. This drop marked sterling’s most significant one-day decline in four weeks. The currency had reached a four-week high just a day earlier. Despite stable bond yields, the pound struggled to maintain momentum.

Market participants responded by increasing bets on further interest rate cuts. Investors now anticipate around 66 basis points of easing throughout the year, up from prior expectations of 60 basis points.

Bond Market and Equity Reactions

The bond market showed resilience in response to the BoE’s actions. Two-year bond yields briefly hit their lowest levels since October. Meanwhile, longer-term bond yields, such as the 10-year and 30-year bonds, saw a slight increase.

On the equities front, London’s FTSE 100 index surged by 1.5%, reaching a record high. The index benefited from strong corporate earnings and a weaker pound, which often favors companies with international revenue. Homebuilding stocks also climbed to a 12-week high, as lower interest rates improve market conditions for the sector.

BoE’s Internal Divisions and Policy Stance

The BoE’s latest policy meeting exposed divisions within the Monetary Policy Committee (MPC). Two members supported a more aggressive 50-basis-point rate cut, including Catherine Mann, who had previously favored steady rates. The UK economy has shown little growth since mid-2024, prompting some policymakers to advocate for a stronger response.

Despite concerns over stagnation, BoE Governor Andrew Bailey dismissed fears of stagflation. He emphasized that underlying inflation remains on a downward trajectory. Some analysts, including Nick Rees from Monex Europe, believe the bond market’s reaction provides a more accurate reflection of the economic situation than the volatile forex markets.

Future Outlook for the UK Economy

The BoE’s actions highlight growing economic challenges for the UK. While lower interest rates may support borrowing and investment, they also signal economic weakness. Additionally, global trade tensions remain a concern. Recent tariff threats by U.S. President Donald Trump against Mexico and Canada could impact global trade flows. However, these potential effects are not yet reflected in official forecasts.

Investors will closely watch upcoming economic data and BoE policy signals. The forex market is expected to remain volatile as traders assess the impact of interest rate adjustments and shifting growth expectations.

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