EUR/GBP holds steady below 0.8700 as traders await BoE rate decision
- EUR/GBP flat lines near 0.8670 in Thursday’s early European session.
- BoE is expected to keep rates on hold at 4.0% later on Thursday.
- ECB’s Guindos said the current interest rate is appropriate based on inflation developments.
The EUR/GBP cross trades on a flat note around 0.8670 during the early European session. Traders prefer to wait on the sidelines ahead of the Bank of England (BoE) interest rate decision. aThe BoE is expected to hold interest rates steady at 4.0% at its September meeting later on Thursday.
UK inflation, as measured by the Consumer Price Index (CPI), was unchanged in August, the Office for National Statistics (ONS) reported on Wednesday. The UK headline Consumer Price Index (CPI) rose 3.8% over the year in August, at the same pace seen in July, softer than the 3.9% expected.
Financial markets are widely predicting that BoE policymakers will keep interest rates on hold at 4.0% on Thursday amid signs of sustained inflationary pressures at almost twice its official 2% target rate.
Rising expectations that the European Central Bank (ECB) is done cutting rates could underpin the shared currency against the USD. ECB Governing Council members Martins Kazaks and Gediminas Simkus said on Tuesday that interest rates don’t need to be cut further right now, though neither of them ruled out an eventual move.
Meanwhile, ECB Vice President Luis de Guindos said on Wednesday that the current interest rate is appropriate based on inflation developments and the transmission of monetary policy.
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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