BoE Analysis: Bailey bails out with first sign of soft inflation, more Sterling falls likely

A close call gone in favor of doves? This is the first impression from the Bank of England's first unchanged rate decision in over a year. However, a closer look implies an end to the tightening cycle and cuts on the road, weighing on the Pound Sterling. 

The BoE was on course to raise rates by another 25 bps, until inflation surprised to the downside. The headline Consumer Price Index (CPI) came out at 6.7% and Core CPI at 6.2%, both below estimates. That undermined market certainty about a rate hike.

Nevertheless, the decision to leave borrowing costs at bay sent the Sterling down, and a pullback seems temporary. The Monetary Policy Committee (MPC) voted 5-4 against increasing rates, in a move that some observers see as a carefully planned message to markets meant to convey that another hike is on the cards. An open door to further tightening was seen in the accompanying statement. 

I see this split as genuine, reflecting a confusing turning point in the economy. For markets, uncertainty coming from the MPC's is only one reason to sell the Sterling. 

The fall in inflation is not the only issue holding the BoE back from hikes. Unemployment has been increasing, and growth seems shaky – the economy shrank in July. 

The pause in September likely marks the end of the tightening cycle from the "Old Lady," as the BoE is also known. The British pause is substantially different from the American one – the Federal Reserve (Fed) has a strong economy behind it. 

I expect further Pound weakness despite an accelerated pace of Quantitative Tightening. The BoE announced it is ramping up the pace at which it withdraws pandemic-era liquidity from markets. 

Moreover, the BoE's pause may also weigh on the Euro, reminding investors that the European Central Bank (ECB) is also likely to refrain from further hikes. 

The countdown to cuts has begun.