(qlmbusinessnews.com Fri. 4th Oct, 2024) London, UK —
UK Pound Tumbles Amid Hints of Further Bank of England Rate Reductions
The pound has experienced a sharp drop following comments from Bank of England Governor, Andrew Bailey, suggesting that the central bank could be “a bit more aggressive” with interest rate cuts if inflation continues to ease.
In an interview with *The Guardian*, Bailey expressed optimism over the UK’s inflation outlook, stating that cost-of-living pressures had not been as stubborn as initially feared. However, he also cautioned that the Bank was closely monitoring the situation in the Middle East, warning of the risk of an oil price surge.
Sterling fell by 1.5 cents against the US dollar shortly after the article was published on Thursday, reaching a three-week low of $1.31. The pound had already dropped by more than 1% earlier in the week, but Bailey’s remarks appeared to accelerate the decline.
Kathleen Brooks, research director at XTB, explained: “The market has taken Bailey’s comments as a sign to expect further interest rate cuts. While the pound has already seen significant losses this week, the potential for further declines is limited in the short term. However, Bailey's words have made it more challenging for the pound to recover.”
Investors are now anticipating that the Bank of England will cut interest rates again at its November meeting, with markets fully pricing in a reduction of a quarter percentage point to 4.75%.
The central bank had previously lowered interest rates in August, cutting them from 5.25% to 5%, marking the first reduction since the onset of the COVID-19 pandemic. While rates were held steady in September, Bailey indicated that the Bank was prepared to resume cuts if inflation trends remained favourable.
Inflation currently stands at 2.2%, just above the Bank’s 2% target. However, Bailey signalled that if inflation continues to fall, the Bank could take a more “activist” approach to reducing rates.
Despite this, investors are concerned that escalating tensions in the Middle East could push oil prices back up towards $100 per barrel, potentially reigniting inflationary pressures. The recent Israeli invasion of southern Lebanon and Iran’s missile launches in response have fuelled concerns of further oil supply disruptions.
Bailey acknowledged the geopolitical risks, stating, “Geopolitical concerns are very serious. It’s tragic what’s happening, and the real concern is how these events might interact with already strained markets.”
However, he noted that oil prices had not seen a significant rise over the past year, despite the ongoing conflict. “For monetary policy, it’s a relief we haven’t faced a major oil price surge so far. But we remain vigilant as the situation could change.”
Bailey also emphasised the commitment from key players in the region to maintain market stability, although he warned that this control could falter if the conflict worsened. “We must watch the situation closely, as it could deteriorate quickly.”
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