Bank of England expected to hold rates despite sluggish UK economy

• The Bank of England is expected to hold its policy rate at 4.50%.
• UK inflation figures remain well above the BoE’s target.
• GBP/USD extends its rally past the psychological 1.3000 barrier.

The Bank of England (BoE) is set to reveal its monetary policy decision on Thursday, marking the second meeting of 2025.

Expectations are high among market watchers that the central bank will keep its benchmark rate at 4.50%, following a 25 basis point reduction in the previous month. 

Alongside the decision, the BoE will publish the meeting Minutes, and Governor Andrew Bailey will hold a press conference to shed light on the reasoning behind the move.

Barring any surprises in the interest rate decision, all eyes will then shift to the bank’s forward guidance and economic outlook.    

UK economic outlook: Stubborn inflation, fading growth

The Bank of England (BoE) lived up to expectations in February, delivering a hawkish rate cut backed unanimously by the nine-member Monetary Policy Committee (MPC).

Meanwhile, fresh data from the Office for National Statistics (ONS) revealed an unexpected uptick in the UK’s annual headline inflation, which climbed to 3.0% in January from 2.5% in December. Core inflation, which excludes food and energy costs, also rose, hitting 3.7% over the last 12 months.

In addition, growth figures painted a less optimistic picture. The UK’s Gross Domestic Product (GDP) unexpectedly shrank by 0.1% in January. Furthermore, downbeat Industrial and Manufacturing Production data also added to the gloomy picture, while the S&P Global Manufacturing PMI remained stuck in contraction territory during the same month.

Following these disheartening prints, the swaps market now sees around 56 basis points of easing by the BoE through year-end.

At the BoE’s latest monetary policy gathering, Governor Andrew Bailey explained that global economic uncertainty played a key role in the decision to add the word “careful” to the bank’s future interest rate guidance.

At a news conference, he remarked that this uncertainty was “two-sided” — suggesting it could either hinder the disinflation process or, conversely, accelerate it. 

“It could lead to conditions which actually make the path of disinflation less assured,” Bailey noted, before adding that it “frankly could also… lead to conditions which have the opposite effect and lead to it being a faster path for disinflation.”

How will the BoE interest rate decision impact GBP/USD?

As previously mentioned, investors widely anticipate the BoE keeping its interest rate unchanged on Thursday at 12:00 GMT.

With that in mind, the British Pound (GBP) will likely stand pat to the decision, but it could show some reaction to how rate-setters vote. Investors will also pay close attention to Governor Andrew Bailey’s remarks.

Ahead of the event, GBP/USD managed to trespass, albeit briefly, the psychological 1.3000 barrier, with the pair closely following USD dynamics as well as developments in the US tariff narrative.

Pablo Piovano, Senior Analyst at FXStreet, noted that GBP/USD managed to break above the critical 1.3000 hurdle earlier in the week, coming under some renewed downside pressure since then.

“Once Cable clears its 2025 high of 1.3009 (set on March 18), it could embark on a potential visit to the November 2024 top at 1.3047”, Piovano added.

“On the downside, the 200-day SMA at 1.2795 serves as the initial safety net, supported by the transitory 100-day SMA at 1.2621 and the weekly low of 1.2558 (February 28). If selling pressure accelerates, the pair could dip toward the 55-day SMA at 1.2552, followed by deeper support at the February trough of 1.2248 (February 3) and the 2025 bottom at 1.2099 (January 13)”, Piovano concluded.