The Bank of England (BoE) has lowered its policy rate by 25 basis points to 4%. This decision was made after a close vote of 5-4, taking two rounds of voting, marking a first for the Monetary Policy Committee. The BoE predicts that the Consumer Price Index (CPI) will peak at 4.0% in September 2025, while food price inflation is expected to reach 5.5% at the same time. They also forecast GDP growth of 1.25% in 2025, with growth of 0.1% in Q2 and 0.3% in Q3. In one year, the BoE anticipates a CPI of 2.7%, dropping to 2.0% within three years.

Pound Reacts to Rate Cut

After the announcement, GBP/USD increased by 0.4%, hitting 1.3413. The market is expecting more rate cuts, possibly lowering the rate to 3.8% by Q4 2025. BoE officials will need to balance slower growth with rising inflation when making future policy choices. They predict that private-sector wage growth will continue at a moderate pace over the next two years. The BoE faces the challenge of managing a slowing economy alongside rising inflation. The Monetary Policy Committee may have split votes on interest rate decisions moving forward. Governor Andrew Bailey is focused on a downward trend for interest rates while keeping an eye on changing economic conditions. The 5-4 vote to cut rates shows a divided Bank of England, indicating that future policy will be hard to predict. This creates opportunities for trading, with UK assets likely to see more volatility in the weeks ahead. The market appears to be preparing for another rate cut to 3.8% by the year-end, as seen in SONIA futures. Given the aggressive rate hikes of 2022-2023, this change in direction is notable despite the inflation forecast of 4.0%. This could present profitable opportunities, but the divided committee adds some risk.

Currency Strategies Amidst Uncertainty

The pound’s rise to 1.3413 following the announcement shows that the rate cut was less aggressive than some anticipated. It may be useful to employ currency options like straddles or strangles to take advantage of potential swings in GBP/USD. This strategy can benefit from significant price movements in either direction, which seems likely given the uncertain outlook. The BoE faces a challenging situation, needing to cut rates even with an inflation peak forecast of 4.0%. This situation echoes the stagflationary issues seen worldwide in the early 2020s. Recent data, such as the S&P Global/CIPS UK Manufacturing PMI dropping to 48.5 in July 2025, supports this sentiment of slowing growth and aligns with the bank’s easing stance, even amid price pressures. Governor Bailey’s focus on reducing rates suggests a clear long-term strategy, although the timing remains uncertain. As a result, we should consider longer-term interest rate swaps to prepare for a lower-rate environment over the next two to three years. In the meantime, we need to stay alert to upcoming wage growth and CPI data, as these may influence the next 5-4 vote. Create your live VT Markets account and start trading now.

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