British Pound nears 1.3500 as it recovers from session lows following BoE rate hike

• The BoE’s first interest rate rise in three years lifts GBP/USD to 1.3480 from session lows around 1.3450.
• A unanimous BoE vote delivers a 25 basis point increase in Bank Rate to 4%.
• A single interest rate rise will be insufficient, in the view of some policymakers.
  

A widely anticipated interest rate rise from the Bank of England on Thursday, accompanied by calls from some policymakers for additional monetary tightening, has helped the British Pound (GBP) recover from session lows against the US Dollar (USD). Trading at 1.3480, GBP/USD retains modest gains on the day following a rally of about 1.3% over the past seven days.

In line with broad expectations, a unanimous vote by the Bank of England’s Monetary Policy Committee lifted its benchmark interest rate by 25 basis points to 4%. Alongside the decision, the central bank upgraded its Gross Domestic Product (GDP) growth forecast for 2027 from 1.1% to 1.3%, while some committee members indicated that further rate rises would follow.

Attention now turns to Governor Andrew Bailey’s press release, due to begin in a few minutes. It is likely to shed more light on the BoE’s monetary policy intentions for the near term.

A run of encouraging UK macroeconomic releases had set the stage for the central bank’s first interest rate increase since August 2023. Against that backdrop, sterling had strengthened against most of its peers over the past few days.

Analysts at MUFG Bank believe market expectations are more hawkish than the BoE’s likely stance: “We expect the BoE to signal that further tightening is likely to be required but not as much as currently priced in. The UK rate market had been pricing in 4-5 hikes, although that has been scaled back as the price of oil has dropped sharply this week.” A more cautious message from Bailey therefore seems likely to disappoint investors and prompt sterling to give back some ground.