The pound fell sharply on Wednesday after Andrew Bailey suggested the Bank of England could cut interest rates if inflation eases further, in remarks that underscored the fragility of the UK economy.
Sterling slipped 0.7 per cent against the dollar to $1.34 after the governor said there was “a further journey down” possible for borrowing costs, though any cuts would hinge on the inflation outlook. “It will depend on the path of inflation going down,” Bailey said in an interview during a visit to the West Midlands.
His words immediately spooked currency traders, who saw a growing chance of lower rates ahead. While the pound remains more than 7 per cent stronger against the dollar since January, its weakness this week reflects fears the UK recovery is faltering.
Bailey pointed to subdued consumer demand as a key drag. “People are being quite cautious at the moment. Of course, that affects spending … People aren’t going out as much; they’re not shopping as much; they’re not going out to restaurants and so on as much,” he said.
The comments follow grim data showing UK retail sales last month were 2.1 per cent below pre-pandemic levels, while GDP flatlined in July. Inflation, meanwhile, has proved stubborn, stuck at 3.8 per cent in July and August — its highest in 19 months. The Bank of England expects a peak of 4 per cent in September.
Markets broadly expect the central bank to hold rates at 4 per cent for the rest of the year, but Bailey’s hint that cuts could be on the table if inflation subsides has added new uncertainty.
Government borrowing costs were little moved, with 30-year gilt yields steady at 5.5 per cent. Against the euro, sterling edged up 0.06 per cent to €1.14 but remains 5 per cent down since the start of the year.
