Bank of England August Rate Decision Preview: Pound Likely to Enter a Fluctuation Phase

TradingKey - On 7 August 2025, the Bank of England (BoE) will announce its policy interest rate decision. The prevailing market view suggests a high likelihood of a 25-basis-point rate cut, lowering the benchmark rate from the current 4.25% to 4%. Our assessment aligns with this expectation. The BoE currently faces a challenging dilemma: on one hand, slowing economic growth and a weakening labour market strengthen the case for further rate cuts this month; on the other hand, persistently high inflation constrains the scope for significant rate reductions. In this context, the BoE’s policymakers are likely to prioritise supporting economic growth over curbing inflation, ultimately opting for a 25-basis-point cut. However, significant disagreements among committee members are expected to emerge.

In the foreign exchange market, given the coexistence of low growth and high inflation in the UK economy, the Bank of England is expected to slow its pace of rate cuts after August. In contrast, with a weakening US labour market and no significant signs of reflation, the Federal Reserve is likely to resume its rate-cutting cycle in September. Overall, the current downward trend in the GBP/USD exchange rate is expected to stabilise, transitioning into a phase of relatively modest fluctuations. 

Source: TradingKey

Main Body

On 7 August 2025, the Bank of England (BoE) will announce its policy interest rate decision. The market widely anticipates a 25-basis-point rate cut, reducing the benchmark rate from the current 4.25% to 4%, continuing the BoE's pattern of quarterly rate reductions (Figure 1). Our view aligns with this market expectation.

Figure 1: BoE Policy Rate (%)

Source: Refinitiv, TradingKey

The BoE currently faces a challenging dilemma. On one hand, the UK’s real GDP has contracted for two consecutive quarters, compounded by tax hikes that have dampened consumer confidence and slowed corporate hiring. The unemployment rate, after stabilising from November 2024 to February 2025, has been steadily rising since March (Figure 2). This situation provides the BoE with impetus to continue its rate-cutting policy. On the other hand, both headline and core CPI have been on an upward trajectory since September 2024, currently standing at 3.6% and 3.7%, respectively, well above the BoE’s 2% target (Figure 3). This inflationary pressure limits the BoE’s ability to implement significant rate cuts this month.

Figure 2: UK Unemployment Rate (%)

Source: Refinitiv, TradingKey

Figure 3: UK CPI (%)

Source: Refinitiv, TradingKey

This dilemma was already evident during the previous rate cut decisions. In May, when the Bank of England (BoE) lowered the benchmark interest rate by 25 basis points, the Monetary Policy Committee’s vote revealed a three-way split: the majority supported a further 25-basis-point cut, some members advocated for a 50-basis-point reduction, while others favoured maintaining the rate unchanged. For this month’s interest rate decision, we anticipate that the BoE’s policymakers may face similar divisions. Given the current challenges, they are likely to prioritise supporting economic growth over curbing inflation, ultimately implementing a 25-basis-point rate cut, though disagreements among members will likely remain pronounced.

In the foreign exchange market, the GBP/USD exchange rate has been steadily declining since its early July peak, driven by the UK’s weak economic performance, resurgent inflation, and the BoE’s ongoing rate cuts. Looking ahead, given the UK’s challenges of low growth coupled with high inflation, the BoE is expected to slow its pace of rate reductions. In contrast, with a softening US labour market and no clear signs of reflation, the Federal Reserve is likely to resume its rate-cutting cycle in September. Overall, the current downward trend in GBP/USD is expected to stabilise, transitioning into a phase of relatively modest fluctuations.

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