Sterling fell on Thursday after the Bank of England Governor Andrew Bailey suggested the central bank could become ‘more activist’ in cutting interest rates.
In a wide-ranging interview with the Guardian newspaper, Bailey held out the prospect of the BoE becoming a ‘bit more aggressive’ in cutting interest rates provided the news on inflation continued to be good.
In response, sterling fell to $1.3116 on Thursday from $1.3271 at the time of the London close on Wednesday.
Inflation as measured by the consumer prices index currently stands at 2.2%, just above its official 2% target, but Bailey said he was encouraged by the fact that cost of living pressures had not been as persistent as the BoE thought they might be.
He said if the news on inflation continued to be good there was a chance of the Bank becoming more ‘a bit more activist’ in its approach to cutting interest rates, now at 5%.
Bailey said the economy has proved more resilient than he feared two years ago, or even a year ago. ‘I think the economy has come through the shocks of the last five years better than many of us feared. So there’s a base there to develop.’
Kathleen Brooks at XTB Research said the market has used Bailey’s comments as a ‘green light’ to price in more monetary loosening.
She noted the market has fully priced in a rate cut from the BoE next month, and sees a 61% chance of another cut in December, up from 47% before.
Brooks explained part of sterling’s weakness this week reflected a flight to safe haven currency, the US dollar, as the Middle East crisis has intensified.
‘The pound is still the best performing currency in the G10 [forex] space so far this year, thus, if tensions escalate further, then we could see another leg lower for GBP/USD,’ she suggested.
Forex analysts at Goldman Sachs said without further context, it is difficult to fully gauge a possible change in tone from Bailey since the September meeting.
‘Given the limited key data on inflation and the labor markets since the meeting, it would be surprising if the BoE‘s thinking had changed markedly in that time, and we think ‘more aggressive’ cuts could also refer to a switch to a pace of consecutive 25 [basis points], which has been our economists‘ base case.’
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