- GBP/JPY extends rally for third straight day, surges past 197.00, reaching fresh weekly high.
- The Bank of England cuts policy rate by 25 basis points to 4.00%, its lowest level since March 2023, in a closely split 5-4 vote following an unprecedented second round of voting.
- Markets are now pricing in just 17 basis points of further BoE cuts by year-end, down from 25 bps expected prior to the announcement.
The British Pound (GBP) extends gains against the Japanese Yen (JPY) for the third consecutive day as traders react to the Bank of England’s (BoE) monetary policy decision, with GBP/JPY climbing above the 197.00 psychological mark, reaching a fresh weekly high. At the time of writing, the cross is hovering around 197.75 during the early American session, up nearly 0.47%.
The Bank of England cut its main interest rate by 25 basis points (bps) to 4.00%, the lowest level since March 2023. Although the rate cut was widely expected, the decision was more complicated than usual. For the first time in the bank’s history, a second round of voting was needed to reach a final decision. The first vote ended in a 4-4-1 split: four members wanted to keep rates unchanged, four supported a 25-bps cut, and one member, Alan Taylor, voted for a bigger 50-basis-point cut. In the second vote, Taylor changed his mind and supported the smaller cut, helping the committee reach a narrow 5–4 majority.
In the accompanying Monetary Policy Report, the Bank of England acknowledged that the underlying economic growth remains subdued and slack has emerged across the economy. However, the report also noted that trade policy uncertainty has decreased, offering a slightly more stable backdrop. The central bank stressed that the pace and timing of future rate cuts will depend on how quickly inflation comes down. It made clear that policy decisions will be guided by incoming data.
Governor Andrew Bailey delivered a cautious message during his press conference. “Interest rates are still on a downward path, but any future cuts will need to be made gradually and carefully,” Bailey said. He highlighted that the labor market is loosening and that domestic wage and price pressures have generally continued to ease. Still, Bailey warned that the risk of second-round effects, such as rising wages pushing inflation back up, remains in focus.
Bailey emphasized, “It’s important that we do not cut bank rate too quickly or too much.” He also noted that headline inflation might rise slightly in the near term, but said there are “good reasons not to expect that increase to last.” He further explained that a gradual normalization in pay growth should help bring down services inflation over time. The BoE raised its near-term inflation forecast, now expecting UK headline inflation to rise to 4.0% in September, up from a previous estimate of 3.7%.
Despite the rate cut, the British Pound held firm as markets viewed the central bank’s tone as cautious rather than aggressively dovish. In response, traders have pared back expectations for further rate cuts this year. Markets are now pricing in just 17 basis points of additional easing in 2025, compared to another 25bps cut anticipated before the announcement.
On the other hand, the Japanese Yen weakened after reports on Wednesday suggested that U.S. President Donald Trump may introduce an additional 15% tariff on all goods imported from Japan. The news added to existing pressure on the Yen as markets also assessed the Bank of Japan’s (BoJ) latest policy stance. Last week, the BoJ held interest rates steady but raised its inflation outlook, while warning about increasing downside risks linked to global trade tensions. Meanwhile, minutes from the central bank’s June meeting showed that policymakers remain open to further policy tightening, particularly if external risks begin to fade.
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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