GBP/CAD bounces off 4-week low with BoE cautious about cuts

The GBP/CAD currency pair rebounded from Thursday’s 4-week trough, after the Bank of England kept borrowing costs on hold and said it wanted more proof inflation would go back to target before cutting rates.

The Bank of England left its benchmark interest rate without change at a 16-year high of 5.25% for the fourth consecutive policy meeting in February, as largely expected.

However, two Monetary Policy Committee members voted in favor of a 25 basis point rate hike, while one member voted in favor of a 25 bps cut.

The BoE said monetary policy would have to remain restrictive for long enough so that inflation is brought back down to its 2% target sustainably in the medium term.

Yet, the central bank removed a reference to further policy tightening from its statement and noted the risks to inflation were more balanced.

The BoE also stressed that key inflation indicators remained elevated, although services inflation and wage growth had slowed more than expected.

“We’ve had some good news over the past few months. Inflation has fallen a long way from 10% a year ago to 4% now. Things are moving in the right direction,” BoE Governor Andrew Bailey said at a press conference following the policy decision.

“We have to be more confident that inflation will fall all the way back to the 2% target and stay there, and we’re not yet at a point where we can lower interest rates.”

Markets are now pricing in about two thirds chance of a 25 basis point rate cut by May. And, a total of 110 basis points of rate cuts are priced in for this year.

Meanwhile, CAD traders are now expecting the minutes of the Bank of Canada’s January policy meeting, which will be released on Monday.

The Bank of Canada left the target for its overnight rate at 5% for the fourth successive meeting in January, in line with market expectations, with borrowing costs at a 22-year high.

As of 7:39 GMT on Friday the GBP/CAD currency pair was inching down 0.01% to trade at 1.7051. Yesterday the minor Forex pair went down as low as 1.6967. The latter has been the pair’s weakest level since January 5th (1.6883).

The currency pair gained 1% in January.