The Bank of England Kept Rates Unchanged, but There's an Important "But"

[Ben Graham]

The Bank of England recently made optimistic statements indicating that the country has managed to tame inflationary pressures. This is a significant achievement, considering the prolonged period of high inflation that has worried both the central bank and the public. However, as is often the case in economics, victory in one battle opens the way to new challenges. The rising employment crisis is now in the focus of the British financial regulator.

In yesterday's meeting, the BoE decided to keep the key interest rate at 3.75%. This decision was not easy, as evidenced by the voting ratio among the Monetary Policy Committee: 5 voted to maintain the rate, while 4 favored a cut. Such a division shows how ambiguous the current economic situation is and how difficult the choice is between controlling inflation and supporting the labor market.

On the one hand, maintaining a high rate aims to keep inflation under control and prevent it from picking up again. On the other hand, this decision puts jobs at risk, as high interest rates can slow economic growth and, consequently, reduce labor demand. Thus, the BoE faces a difficult dilemma: either restrain inflation at the risk of triggering a recession and rising unemployment, or stimulate employment at the risk of reigniting inflation.

According to the latest forecasts from the central bank, the number of unemployed is expected to rise by nearly 110,000 compared to the November projections, as current restrictive policies have a negative impact on the economy. New forecasts suggest that 108,000 people will be without jobs this year. Alongside a warning that the unemployment rate could reach 5.3% by spring, the BoE sharply revised its 2026 growth forecast down from 1.2% to 0.9%.

"From the current 3.4%, the rate will drop to about the target level of 2% by April and remain at that level for the next three years," the BoE stated. Even with two rate reductions of a quarter percentage point in 2026 that would bring borrowing costs down to 3.25%, the bank believes it has managed to tame inflation.

As Deputy Governor Dave Ramsden noted at a press conference on Thursday, developing monetary policy is always a difficult compromise. "We must consider subdued economic activity, the labor market situation, and inflation," he said. "Therefore, we balance these risks." However, BoE Governor Andrew Bailey rejected the idea that unemployment is a price worth paying to lower inflation, seeking to avoid phrases that have previously caused problems for officials. "I want to decisively put an end to this," Bailey said. "We do not welcome unemployment. Let's be clear that our task is to achieve the target inflation rate." At the moment, Bailey, whose decision will likely determine when the next interest rate reduction occurs, prioritizes inflationary risks, even though he stated that his personal view aligns with the staff's on the growing labor market issues.

According to the bank, the natural level of unemployment in the UK is 4.75%. Any lower value indicates inflation, while any higher value indicates that the economy is not functioning at an optimal level. This implies that by the beginning of next year, job losses will total around 200,000. The bank stated that the rise in unemployment is primarily due to insufficient hiring rather than layoffs.

The British pound reacted actively to the news that rates may be lowered in the near future, falling against the U.S. dollar.

As for the current technical picture for GBP/USD, pound buyers need to overcome the nearest resistance at 1.3590. Only then can they target 1.3630, above which it will be quite challenging to break through. The furthest target will be the area of 1.3660. If the pair falls, bears will attempt to take control of 1.3545. If this succeeds, breaking the range will deliver a severe blow to bulls' positions and push GBP/USD to a low of 1.3510, with the prospect of reaching 1.3480

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