The Bank of England is likely to lower its main interest rate from 4.25% to 4.0%. This will be the fifth cut since August 2024, influenced by a weakening job market and ongoing inflation that remains above target. Governor Andrew Bailey and most members of the Monetary Policy Committee are expected to back this quarter-point reduction. However, there may be some disagreement, as some members want a larger cut while others are concerned about inflation.

BoE’s Monetary Policy Strategy

The BoE’s approach, which calls for gradual cuts, may come under scrutiny if inflation rises to 4%. The market expects another rate cut in November, but forecasts only one or two more in 2026. This would keep the Bank Rate around 3.5%, higher than the eurozone’s 2%. The announcement will be made at 1100 GMT, followed by a press conference at 1130 GMT. EUR/GBP is in focus, as the euro is gaining strength against the UK pound ahead of the meeting. Meanwhile, Deutsche Bank predicts more rate cuts from the BoE, contrasting with the European Central Bank’s potential halt in easing.

Economic Signals and Market Expectations

As we approach the Bank of England’s decision tomorrow, a rate cut is widely anticipated despite mixed economic signals. The market is ready for a quarter-point reduction, but the real concern lies in finding a clear path forward. This decision comes amid a slowing economy and persistent inflation. Recent data shows inflation stubbornly at 3.8% in July 2025, with unemployment rising to 4.5%. This reflects the impact of last year’s tax policies and ongoing trade tensions. The Monetary Policy Committee faces the challenge of controlling inflation while also needing to support economic growth. A split vote is possible, which could lead to increased market volatility. Derivative traders may consider options on short-term interest rate futures to prepare for surprises in the bank’s guidance. A divided committee raises the risk of a market reaction to the post-meeting statement. The differing policies of London and Frankfurt make the EUR/GBP exchange rate particularly interesting. While we expect the BoE to cut rates to 4.0%, the European Central Bank has kept its key rate at 2.75% since June and may be done with rate cuts for now. This fundamental difference is likely to strengthen the euro against the pound in the medium term. Looking ahead, even with additional cuts, the market suggests that the UK base rate will only drop to around 3.5% in 2026. This contrasts sharply with the near-zero rates we experienced for over a decade after the 2008 financial crisis, indicating a structurally higher cost of borrowing. This new reality will influence derivative pricing for years. In conclusion, the anticipated 25 basis point cut is likely already factored into the market. What will influence trading in the coming weeks is Governor Bailey’s forward guidance, particularly regarding any changes to the “gradual and careful” pace of one cut per quarter. Any indication that the committee might consider quicker cuts could put immediate pressure on the pound. Create your live VT Markets account and start trading now.

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