BoE Rate Cut Sparks Pound Volatility Amid Inflation Concerns
The Bank of England (BoE) cut its benchmark interest rate by 25 basis points to 4.5% in a 7-2 vote, a widely expected move. However, the unexpected vote split triggered a brief selloff in the pound. GBP/USD dropped towards $1.23 from $1.25, while GBP/EUR slipped below €1.20. Selling pressure eased after Governor Andrew Bailey provided reassuring comments, and upward inflation revisions cast doubt on the likelihood of further aggressive rate cuts.
The decision highlighted divisions within the Monetary Policy Committee (MPC) and underscored deep uncertainty about the UK’s economic outlook. Dissenters Swati Dhingra and Catherine Mann pushed for a larger 50bp cut, with Mann’s shift particularly notable given her previously hawkish stance. This marked a clear dovish signal. However, the BoE’s inflation forecast revisions provided a more hawkish counterbalance. Additionally, the Bank sharply downgraded its GDP growth projection for 2025 from 1.5% to 0.7%, citing weaker-than-expected economic performance and a more subdued outlook for the first half of the year.
The UK’s persistent supply-side weaknesses continue to complicate the balance between growth and inflation. Low potential growth, sticky wage increases, and lingering inflationary pressures suggest that a prolonged period of sluggish GDP growth may be necessary to bring inflation sustainably back to target.
Looking ahead, next week’s inflation and GDP data will be pivotal in shaping expectations for the BoE’s next move. While the pound’s yield advantage is eroding, its limited exposure to tariff risks should help prevent significant weakness against major currencies.
French Government Survives No-Confidence Vote, Markets React Positively
The French government successfully withstood a no-confidence vote on Wednesday, clearing the way for the long-delayed annual budget to move forward. While widely expected, this outcome remains a constructive development for markets. The French risk premium—measured by the yield spread between French and German bonds—has eased from its peak of 90 basis points to 70. Meanwhile, French equities have outperformed both U.S. and broader European markets, delivering a 7% gain year-to-date.
Additional support for risk assets could come from the European Central Bank, which is expected to lower rates by 87 basis points this year. However, the extent of policy easing will depend on U.S. tariff decisions and the pace of European inflation. Investors have tempered their expectations for rate cuts following remarks from ECB Chief Economist Philip Lane, who warned that inflation may take longer to subside than previously projected.
In the currency markets, the euro has extended its rally for a third straight session—its longest winning streak since late October. EUR/USD must break above the 50-day moving average at $1.0420 to maintain upward momentum toward $1.05.
