Pound Sterling Fails to Rally Despite Hawkish BoE Vote

The Bank of England's decision to keep interest rates unchanged at 3.75% on Thursday might have initially surprised markets, but its guidance suggests that policymakers are content to wait for clearer evidence of second-round inflation effects.

Rabobank notes that while three members of the Monetary Policy Committee voted in favor of a rate hike, their reasoning was not as hawkish as it seemed. The bank believes that the market correctly looked through the headline split and focused on the guidance instead.

The committee's willingness to wait for stronger evidence of second-round inflation effects and continued disinflationary trends in recent data is seen as a slightly less hawkish signal. This tension explains the muted currency reaction, with Sterling initially rising but then falling below its pre-release levels within 20 minutes.

Rabobank expects Bank Rate to remain at 3.75% through the end of 2027, citing the Committee's patience and willingness to wait for clearer evidence before tightening monetary policy. The bank does not rule out a rate hike in November but sees it as unlikely.