The Bank of England has kept its policy rate at 4% following the November meeting. Governor Bailey emphasized the need for a steady decline in inflation before considering rate cuts. The forecast indicates that rates may decrease gradually, provided there isn’t a sudden rise in prices.

Recent Inflation Data

UK inflation recently dipped slightly below expectations, but we need more data to ensure a steady move towards the 2% target. There are concerns about second-round effects from increasing food and energy prices. The Bank of England anticipates that CPI inflation will drop below 2% by mid-2027. Currently, economic activity in the UK is below potential, with job vacancies falling and employment growth stalling. Growth forecasts are modest, and GDP growth predictions have been slightly revised for the next few years. Fiscal challenges are also present, with possible tax increases ahead. After the BoE’s announcement, the GBP/USD exchange rate pulled back from highs. The British Pound gained strength against several currencies but is still weaker than the New Zealand Dollar. The focus is shifting to future Bank of England discussions and potential rate changes that could impact the British Pound. The Bank of England maintained its 4% policy rate, but what’s notable is the tight 5-4 vote, indicating a significant division. Four members supported an immediate cut, suggesting the committee leans towards lowering rates in the future. We should prepare for a possible rate cut in early 2026 if upcoming data shows further economic decline.

Outlook For UK Interest Rates

Given this situation, we should brace for lower UK interest rates in the coming months. The market is already pricing in a gradual decline, which the Governor termed a “reasonable view.” However, the divided vote indicates cuts may come sooner than expected. This makes it wise to consider locking in fixed rates on UK interest rate swaps or buying short-sterling futures for early 2026. This dovish outlook is backed by recent economic data. The Office for National Statistics reported that UK inflation dropped to 3.6% in October 2025, continuing the easing trend from September’s 3.8%. Looking at the past, UK GDP growth has been largely flat throughout much of 2024 and early 2025, so with the economy operating below potential, there will be increasing pressure on the Bank to boost growth. For the pound, this creates a tough environment, especially against the US dollar. We can expect the GBP/USD pair to face strong resistance around the 200-day moving average at about 1.3250. Traders might consider buying GBP/USD puts with a strike price below the crucial 1.3000 level to prepare for a possible downturn. The BoE’s cautious stance contrasts with that of the US Federal Reserve, which has maintained a stricter approach against inflation. Recently, Fed officials mentioned they see no immediate need for rate cuts, leading to a policy divergence that favors the dollar. Historically, such divergences, like one seen in 2022, have preceded prolonged periods of weakness for sterling. The clear divide within the Monetary Policy Committee indicates ongoing uncertainty for the next few months. This may mean that sterling volatility could be underestimated, presenting an opportunity for options traders. We think strategies favoring rising volatility, like long straddles, could work well around significant upcoming events. Looking ahead, the next major event will be the government’s budget announcement in three weeks. Chancellor Reeves has warned of “hard choices,” and any significant fiscal tightening could increase pressure on the Bank of England to cut rates more aggressively to mitigate economic impacts. This will be the key event to watch as we adjust our positions. Create your live VT Markets account and start trading now.

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