Andrew Bailey, Governor of the Bank of England, gestures as he addresses the media during a press conference at the Bank of England in London on August 1, 2024.
Alberto Pezzali | Via Reuters
LONDON — The British pound fell more than 1 percent against the U.S. dollar and euro on Thursday after Bank of England Governor Andrew Bailey suggested that more positive inflation data could lead the central bank to a more hawkish approach to reducing interest rates.
Sterling was down 1.17% at $1.3112 by 2 p.m. in London, paring losses of more than 1.3% but remaining at its lowest intraday level since September 12. 20 months, according to a CNBC calculation of LSEG data.
Bailey he told the Guardian newspaper in an interview published Thursday that the BOE could become “a little more hawkish” in its approach to cutting interest rates if inflation developments continue to be good.
He also said he was encouraged that cost-of-living pressures were not as persistent as previously thought, according to the Guardian.
Pound against dollar.
The pound strengthened after the BOE’s monetary policy meeting on September 19, as UK policymakers took a more hawkish tone than those from the US Federal Reserve and the European Central Bank. It also found support over the summer from Labour’s decisive victory in the general election in early July, with investors eyeing a period of political stability and the potential for pro-business reforms.
The upcoming budget, to be announced at the end of October, has already prompted some to question whether optimism around UK assets can be sustained, with political leaders repeatedly suggesting that tax rises and discipline in public spending will be required to to address the deficit.
The pound meanwhile fell 1.1%. against the euro on Thursday, trading at its lowest level since September 20. The drop put sterling on course for its steepest daily drop against the dollar in more than 20 months, according to a CNBC calculation of LSEG data.
That was despite several analysts raising their outlook for the pace of European Central Bank rate cuts this year after inflation prints in the euro zone and Germany fell below 2% this week.
Bank of America Global Research and Moody’s Analytics were among the groups that said they now expect a 25 basis point rate cut from the ECB at its next meeting in October, along with a subsequent cut at the next and final meeting of the year in December . . BOA Global Research said it now saw the ECB’s deposit rate at 2% by June 2025, a quarter earlier than its previous forecast.
The Bank of England kept its key interest rate on hold in September after cutting it by 25 basis points in August to 5%. At its September meeting, the central bank’s Monetary Policy Committee raised concerns about services inflation and wage growth, despite headline inflation hovering close to its 2% target.
Money market pricing on Thursday suggested a strong possibility of two more 25 basis point cuts by the BOE this year at its remaining meetings.
“A simple interpretation of the Governor’s comments is that it could now trigger an upside inflation surprise for the MPC not to cut rates back-to-back in November and December. Previously, guidance suggested the burden of proof was on inflation to surprise downward for such a shift from the ‘gradual’ pace of easing,” Shreyas Gopal, FX strategist at Deutsche Bank, said in a research note.
Francesco Pesole, FX strategist at ING, said the lira’s “correction” could extend to the 1.3 mark in the near term as a “probably longer-term revaluation” meets higher US dollar swap rates, he added.
Inflation risks
Jane Foley, senior FX strategist at Rabobank in London, said in a note on Thursday that Bailey’s recent comments about the possibility of more aggressive rate cuts had “deeply shaken” support for sterling — but noted that the interview presented also the governor to discuss potential risks to sterling. inflationary outlook from rising crude oil prices, following the latest flare-up of tensions in the Middle East.
Bailey told the Guardian: “The geopolitical concerns are very serious… There are obviously pressures and the real issue is how they might interact with some still quite stretched markets in places.”
The central bank had been helped by not having to deal with large oil price increases so far, but it was watching the situation “extremely closely” for potential repercussions, Bailey said.
“My sense from all the conversations I have with my counterparts in the region is that there is, for now, a strong commitment to keep the market stable,” he continued.
Rabobank’s Foley said on Thursday: “While the market has clearly embraced [rate cut] part of it [Bailey’s] statement, inflation risks will remain key. Even discounting the potential impact of an escalation in the Middle East, UK inflation risks still suggest the BoE could be delayed in cutting interest rates by several of its peers.”
— CNBC’s Ganesh Rao contributed to this story.