European session review: the pound fell sharply amid the outcome of the Bank of England meeting

The pound sterling fell by 0.3% against the US dollar, reaching its lowest level since April 24, due to the results of the meeting of the Central Bank of England. As expected, the Bank of England left the interest rate at 5.25%, but two Monetary Policy Committee (MPC) members (Dhingra, Ramsden) preferred to cut the bank rate by 25 basis points. Investors expected that only one MPC member would support an interest rate cut.

The MPC hinted that a first cut since March 2020 could come as soon as its next meeting in June, a potential boost for Prime Minister Sunak. However, the MPC cautioned that indicators of inflation persistence “remain elevated. 

"Services consumer price inflation has declined but remains elevated, at 6.0% in March. Twelve-month CPI inflation fell to 3.2% in March from 3.4% in February. CPI inflation is expected to return to close to the 2% target in the near term, but to increase slightly in the second half of this year, to around 2.5%, owing to the unwinding of energy-related base effects. Conditioned on market interest rates and reflecting a margin of slack in the economy, CPI inflation is projected to be 1.9% in two years’ time and 1.6% in three years. Monetary policy will ensure that CPI inflation returns to the 2% target sustainably in the medium term," MPC said, adding that the Committee will consider upcoming data releases and how these inform the assessment that the risks from inflation persistence are receding.

Currently, markets are waiting for interest rate cuts to begin in the summer, with money markets fully anticipating a 0.25% reduction in August and 0.5% overall this year. Meanwhile, some economists expect a rate cut as early as the next meeting in June, as well as three or more cuts in 2024.