Pound Sterling Slides as Bank of England Holds Rates, Cites Inflation Risks

The British pound weakened on Thursday after the Bank of England (BoE) announced it would hold interest rates steady, as cautious commentary from the central bank outweighed a split vote on the decision. By 7:20 AM ET, the GBP/USD currency pair had fallen 0.23% to 1.3350, according to Investing.com data.

BoE Cites Rising Inflation Concerns

The BoE's Monetary Policy Committee (MPC) maintained its policy rate, a move that was widely anticipated by markets. However, the accompanying meeting minutes revealed a more complex picture, with three members voting in favor of a rate hike. The committee noted that since July, inflation risks have "tilted further to the upside," primarily driven by higher energy prices linked to conflict in the Middle East.

The central bank updated its economic projections, forecasting the Consumer Price Index (CPI) to rise to approximately 3.75% in the fourth quarter of 2026 and surpass 4% in early 2027. The MPC also unanimously voted to continue its quantitative tightening program, planning to reduce its U.K. government bond (gilt) holdings to zero over several years by selling £20 billion annually.

Market Reaction and Analysis

Despite the BoE holding rates, the pound's decline suggests investors interpreted the overall tone as more dovish than the split vote alone would indicate. In contrast to the currency's weakness, the U.K.'s benchmark FTSE 100 stock index rose 0.7% following the announcement, signaling that equity investors welcomed the prospect of borrowing costs not rising further for now.

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According to Francesco Pesole, an FX strategist at ING, the market viewed the BoE's stance as more conservative than expected. The pound's slide was attributed to a combination of diminished expectations for a more aggressive BoE policy path and the persistent strength of the U.S. dollar.

Broad Dollar Strength Continues

The U.S. dollar's recent gains continue to influence currency markets, following a hawkish policy decision from the Federal Reserve on Wednesday. The Fed implemented a 25-basis-point rate hike, and projections from 12 of the 18 FOMC members indicated at least one more increase is expected this year.

"We think risks for the dollar are now more balanced after the monetary policy tailwind has been priced in, but they remain skewed to the upside in the short term," Pesole noted in a report. Meanwhile, the euro has found some support from the European Central Bank's own hawkish stance, which has helped offset pressure from elevated oil prices.