EUR/GBP holds steady near 0.8750 following BoE rate cut, ECB policy hold
- EUR/GBP flat lines near 0.8760 in Friday’s early European session.
- The Bank of England voted to cut interest rates from 4.0% to 3.75% in its December meeting on Thursday.
- The ECB kept rates on hold on Thursday, as widely expected.
The EUR/GBP cross trades on a flat note around 0.8760 during the early European session on Friday. This move follows the Bank of England's (BoE) interest rate cut and market expectations for a steady European Central Bank (ECB) policy. The UK Retail Sales report for November will be in the spotlight later on Friday.
The UK central bank decided to cut its main interest rate by 25 basis points (bps) to 3.75% on Thursday, which was largely expected by the market after cooling UK inflation figures. BoE Governor Andrew Bailey stated that “the extent of further easing in monetary policy will depend on the evolution of the outlook for inflation.” Analysts expect the BoE could next cut in early 2026 if economic data continue to allow for more room or manouver.
On the other hand, the European Central Bank (ECB) kept its key policy rate on hold. The decision came in line with the market expectations. ECB President Christine Lagarde said during the press conference that policy is "in good place," signaling that rates will remain on hold for a long time. A fresh forecast followed the rate decision, predicting stronger economic growth and inflation rising to 2% in 2028 after staying below that level for most of the next two years.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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