British Pound weakens against Japanese Yen as BoE leaves rates unchanged

• GBP/JPY falls as the British Pound weakens following the Bank of England’s widely expected rate hold.
• The BoE keeps rates at 3.75% in a 6-3 vote, as widely expected.
• The Japanese Yen outperforms ahead of Friday’s Bank of Japan decision, adding pressure on the cross.

GBP/JPY trades under pressure on Thursday as the British Pound weakens across the board following the Bank of England’s (BoE) latest monetary policy announcement. At the time of writing, the cross trades around 208.23, down 0.40% on the day.

The Bank of England left its policy rate unchanged at 3.75% in a 6-3 vote, matching market expectations. Chief Economist Huw Pill and external members Megan Greene and Catherine Mann voted for a 25-basis-point increase to 4.00%.

In its monetary policy statement, the central bank warned that inflation risks are tilted to the upside, particularly due to higher energy prices linked to the war in the Middle East. The BoE said monetary policy is being set to ensure that inflation returns sustainably to the 2% target as the economy adjusts to the energy shock.

However, policymakers also said there has been little evidence so far of significant second-round effects on domestic prices and wages. The Committee also noted that financial conditions have tightened since the outbreak of the war and have tightened further since July, raising the borrowing costs faced by households and businesses. Officials said these conditions should help contain inflationary pressure, although members differed over whether the tightening would last without an increase in Bank Rate.

Governor Andrew Bailey also kept the door open to future rate hikes, saying, “If the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten.”

However, the British Pound failed to benefit from Bailey’s hawkish warning. The 6-3 vote split was unchanged from the previous meeting and offered little surprise to traders, while signs of slack in the UK labour market could complicate the case for higher interest rates.

Adding pressure on the cross, the Japanese Yen (JPY) outperforms all its major peers ahead of the Bank of Japan’s (BoJ) monetary policy decision on Friday. A 25-basis-point rate increase is fully priced in, shifting attention to whether the BoJ signals a faster pace of tightening in the coming months. Any hawkish guidance could provide additional support to the Yen and drag GBP/JPY lower.