The BoE kept its interest rates unchanged; sterling weakens

The BoE kept its interest rates unchanged

The Bank of England kept its benchmark rate at 4%, as expected by the analyst consensus. At the same time, the central bank slowed the pace of its reduction in government bond holdings (quantitative tightening) to help minimise volatility in bond markets. The decision reduces the planned run-down of bond holdings from £100 billion (over the last 12 months) to £70 billion (from October 2025 to September 2026). The BoE’s stated objective is to promote financial stability and support economic growth; the moderation in QT is intended to balance the maintenance of interest rates at their current level.

The BoE reaffirmed its expectation that inflation would peak at 4% in September, before slowing gradually towards the 2% target in coming months. Headline inflation currently stands at 3.8% year on year. With price pressures still above target, the scope to accelerate rate cuts remains limited.

In market reaction, sterling fell 0.57% against the US dollar. Meanwhile, the 10-year gilt yield rose 0.69% despite the QT tapering decision.

Equity markets higher after Fed tone

Global equities rose broadly after the Federal Reserve began reducing interest rates. In the US, the S&P 500, Nasdaq 100, and Dow Jones indices increased by 0.48%, 0.95%, and 0.27%, respectively. The Russell 2000 small-cap index gained 2.51%, with smaller companies typically benefiting more in a lower-rate environment. In all three cases, new all-time highs were recorded for US indices.

In Europe, France’s CAC 40 advanced 0.87%, Spain’s IBEX added 0.32%, and Germany’s DAX appreciated 1.35%. The European Stoxx 600 rose 0.79%. In Asia, Japan’s Nikkei 225 climbed 1.15%, while China’s FTSE A50 increased 0.15%.

U.S. jobless claims slow

Weekly initial jobless claims fell to 231,000 from 264,000, better than the analyst consensus. The data are notable because the prior week marked a three-year high; a further rise would likely have unsettled markets owing to potential labour-market deterioration. Continuing Jobless Claims also declined, from 1,927,000 to 1,920,000, again below expectations.

While supportive for the US outlook, the more consequential reference point will be early-October labour data (non-farm payrolls and the unemployment rate). For now, the probability of additional cuts implied by CME Group’s FedWatch has not shifted meaningfully.

Dollar remains on the rise amid uncertain easing path

The Dollar Index strengthened for a second consecutive day by approximately 0.37% at the market close, following the Fed’s 25 bps cut. In his press conference, the Chair Jerome Powell stressed that the FOMC will maintain a “meeting-by-meeting” approach given uncertainty around employment and inflation. Accordingly, incoming data could justify either leaving rates unchanged or delivering further cuts. The decline in jobless claims may also have contributed to the dollar’s firmness.

By contrast, the pound weakened marginally after the BoE held rates and slowed QT. The Japanese yen also depreciated as investors await inflation data and the BoJ’s policy decision in the coming hours. Both moves provided an additional intraday lift to the Dollar Index.

Investors in Asia awaiting BoJ decision

The Bank of Japan (BoJ) is expected to keep its benchmark rate unchanged at 0.5%. However, market attention will focus on Governor Kazuo Ueda’s tone regarding the policy outlook.

Japan’s headline and core inflation rates both stand at 3.1%, above the BoJ’s target and close to multi-decade highs. The forthcoming inflation release could be influential for the debate about potential rate increases.

Conversely, recent reports indicated that Japan’s exports and imports contracted, reflecting the impact of US trade policy—an argument that may weigh on assessments of the economy’s underlying strength.