19.12.202510:39 Forex Analysis & Reviews: The Bank of England Lowered Interest Rates

The British pound would seemingly have been expected to collapse after the Bank of England cut interest rates yesterday. Instead, it rose—and quite solidly against the dollar. On Thursday, the committee voted 5–4 to lower interest rates to a nearly three-year low of 3.75%.

It is clear that the British regulator's direct hints that the pace and scale of future rate cuts are now in question influenced market sentiment. Yesterday's rate cut had already been priced in, but the policymakers' cautious stance had not. Governor Andrew Bailey warned of limited room for maneuver in 2026. The Monetary Policy Committee will have to make decisions in a more challenging environment.

The statement emphasized concerns about inflation and the need to maintain a cautious monetary policy should inflation accelerate. In effect, the rate cut was perceived as a one-off measure to support the economy rather than the continuation of a prolonged easing cycle. This, combined with inflation concerns, supported demand for the pound. Traders reacted by adjusting their expectations for rate cuts next year, focusing on the committee's cautious tone even after this week's sharper-than-expected drop in inflation data. Markets have already fully priced in a quarter-percentage-point cut in 2026.

The Monetary Policy Committee said that available data suggest borrowing costs will continue to decline next year as inflation risks ease. However, in new wording, it warned that decisions on future cuts would be made with careful consideration of a delicate balance as the central bank approaches the neutral interest rate—the level that neither stimulates nor restrains inflation.

"I think there is a case for continuing a more gradual easing," Bailey said in an interview. "Conditions will become more challenging, and I expect the pace of cuts to slow at some point."

The Bank of England now expects inflation to be closer to its 2% target by next spring, after consumer price growth unexpectedly fell to an eight-month low. The government budget scheduled for November 26 is also expected to reduce inflation in the short term. Nevertheless, some of those who supported Thursday's rate cut expressed caution, particularly given uncertainty about the precise end point of the easing cycle. Deputy Governors Sarah Breeden and Dave Ramsden, who have taken a dovish stance at recent meetings, suggested proceeding more carefully. Several officials also voiced concern about wage growth continuing at a pace incompatible with keeping inflation at the 2% target.

As for the current technical picture of GBP/USD, pound buyers need to take out the nearest resistance at 1.3400. Only then will a move toward 1.3425 be possible, above which a breakout would be quite difficult. The most distant target is the 1.3450 level. In the event of a decline, bears will try to seize control at 1.3360. If successful, a break of this range would deal a serious blow to bullish positions and push GBP/USD toward the 1.3340 low, with the prospect of a move to 1.3310.