The EUR/GBP pair is trading flat around the 0.8760 level during the early European session on Friday. The move comes in the wake of the Bank of England’s interest rate cut and market expectations for a steady policy by the European Central Bank. The November UK retail sales report will be in the spotlight later on Friday.
The British central bank decided to cut its key interest rate by 25 basis points to 3.75% on Thursday, which was largely expected by the market after a slowdown in UK inflation numbers. Bank of England Governor Andrew Bailey stated that “the extent of further easing in monetary policy will depend on the evolution of inflation expectations.” Analysts expect the Bank of England to make the next cut in early 2026 if economic data continues to allow more room or manoeuvre.
On the other hand, the European Central Bank kept its key interest rate unchanged. The decision was in line with market expectations. European Central Bank President Christine Lagarde said during the press conference that policy is “in good shape,” indicating that interest rates will remain unchanged for a long time. New forecasts followed the interest rate decision, predicting stronger economic growth and inflation rising to 2% in 2028 after remaining below that level for most of the next two years.
Bank of England FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve “price stability,” or a constant inflation rate of 2%. Its tool for achieving this is by adjusting base lending rates. The Bank of England sets the rate at which commercial banks lend and banks lend to each other, and sets the level of interest rates in the economy as a whole. This also affects the value of the British Pound (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 obtain credit. This is positive for the pound because higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls below target, it is a sign that economic growth is slowing, and the Bank of England will consider lowering interest rates to reduce the cost of credit in the hope that companies will borrow to invest in growth-generating projects – which is negative for the pound.
In extreme cases, the Bank of England can enact a policy called quantitative easing (QE). Quantitative easing is the process by which the Bank of England dramatically increases the flow of credit into a stuck financial system. Quantitative easing is a policy of last resort when lowering interest rates does not achieve the necessary result. Quantitative easing involves the Bank of England printing money to buy assets – usually AAA-rated government or corporate bonds – from banks and other financial institutions. Quantitative easing usually leads to a weakening of the British pound.
Quantitative tightening (QT) is the opposite of quantitative easing, which is triggered when the economy strengthens and inflation begins to rise. During QE, the Bank of England purchases government and corporate bonds from financial institutions to encourage them to lend; In QT, the Bank of England stops buying any more bonds, and stops reinvesting the capital owed on bonds it already holds. This is usually positive for the British pound.
