The GBP weakened in the aftermath of a 25 bps hike by the Bank of England (BoE) on 3 August, with GBP/USD breaking below 1.27. Beyond the knee-jerk reaction, excessive downside in the GBP may be limited from here, in the view of economists at HSBC.

The BoE cut its growth forecasts but raised its medium-term inflation forecasts

In August, the BoE hiked its policy rate by 25 bps to 5.25%, the highest in 15 years. The nine-member MPC split three ways on the decision, while a tightening bias remains in place.

Despite the downward revision to its GDP growth forecasts for 2024 and 2025, the MPC lifted its medium-term inflation forecasts, relative to those it published in May. The committee also flagged how strong pay growth created an ongoing risk of persistent inflation.

All this suggests the BoE retains a modest tightening bias, especially compared to US Federal Reserve (Fed) and the European Central Bank (ECB) which both stressed more explicitly that further rate hikes will depend on data. These hawkish elements below the surface of this BoE decision may limit excessive downside in the GBP from here.