The Bank of England raised its key rate 25 basis points to 4% on Thursday, delivering its first increase since August 2023 in an 8-to-1 vote. Sterling moved little, with GBP/USD settling at 1.3465 after the decision, essentially flat on the day. The pound has now climbed 2.5% from its 2026 low of 1.3137 and trades above its 200-day moving average, sitting in the middle of a broader range between 1.3372 and 1.3591.
Markets Priced the Move, But Outlook Shifts Higher
Before the announcement, markets were almost certain that a hike would occur, with a probability of over 99%. As early as October 20, swap curves had factored in 100 basis points of tightening over the next 12 months. The Bank’s decision to raise rates by 25 basis points, with an 8-1 vote, was in line with expectations. However, the inflation outlook was revised upwards, with the Bank now projecting UK CPI to peak at 4.9% in Q2 2027, up from a previous forecast of 3.2% for early 2027.
The Bank of England delivered its first rate increase in more than three years on Thursday, November 5, and sterling hardly moved. The pair spent the Asian session near 1.3485, with an overnight range of 1.3408 to 1.3484, before drifting lower into the noon London decision. In the immediate reaction to the Monetary Policy Report, the pound recovered slightly from its session lows and settled near 1.3470. By the afternoon it was trading at 1.3461.
Governor Andrew Bailey said Thursday’s increase is unlikely to be the last unless the Middle East conflict is resolved. The lone dissenter, external member Catherine Mann, voted for a half-point increase to 4.25%. The shift from a 6-3 hold in September to a 9-0 vote for tightening in November signals a committee leaning hawkish. Mann argued that a 50-basis-point hike would be good policy from a risk-management perspective.
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The difference in policy paths between the UK and other countries gives sterling a yield advantage. With Bank Rate now at 4%, it matches the upper end of the Federal Reserve’s range of 3.75% to 4.00%. The two-year gilt yield has risen to 4.78%, 28 basis points above the two-year Treasury yield of 4.50%. Although this gap favors the pound, the dollar gained ground on Thursday due to a 57-year low in US jobless claims and hawkish comments from Federal Reserve speakers.
The Bank’s forecasts were based on an oil price of $108, which has since fallen to $97. Brent crude oil prices dropped by 19.6% over three sessions, from $117.64 on October 30 to $94.62 on Wednesday. If oil prices remain at current levels, the Bank’s inflation forecast may be too high, which could weaken the case for further rate hikes. Sterling’s six-session rally stalled just below 1.3503, a level that poses a potential threat to the currency’s advance.
The Dollar’s Stabilization and the Path Ahead
On October 20, the pair broke above 1.3400 for the first time since mid-September on UK jobs data. Sterling has carry on its side and a ceiling at 1.3503 to 1.3535. On October 20, the labor market report showed unemployment falling to 4.7% and private-sector regular pay growth matching both consensus and the Bank’s third-quarter projection at 3.0% year over year, up from 2.9% in July. GBP/USD rose from 1.3300 to just above 1.3400 that day, a five-week high.
On October 21, UK CPI rose to 3.5% in September from 3.1% in August, above the 3.4% consensus. Core inflation climbed to 2.8% from 2.6%, and services inflation to 3.7% from 3.4%. That locked in expectations for a November hike, pushing the probability to 95% and then above 99%. GBP/USD extended its rally, cleared the 200-day moving average and reached 1.3485 in Thursday’s Asian session.
