Pound slides as Bank of England chief says it could be 'more aggressive' in cutting rates

By Jamie Chisholm

The British pound and government bond yields fell sharply early Thursday after Bank of England Governor Andrew Bailey said the central bank could be more aggressive in cutting borrowing costs if inflation remained benign.

In an interview with the U.K.'s Guardian newspaper, Bailey also addressed his concerns that the global economy could be vulnerable to a 1970's-style energy shock if increased turmoil in the Middle East caused a spike in oil prices.

Bailey, who became governor in March 2020, said he welcomed evidence that cost of living pressures now were not as bad as the central bank had feared. This has helped consumer price inflation - which hit more than 11% in October 2022 - fall to 2.2%, just above the BoE's 2% target.

If the news on inflation continued to be good, then the central bank could become " a bit more aggressive" in cutting interest rates, Bailey said. The main rate is currently 5% after Bailey and colleagues on the Monetary Policy Committee trimmed it by 25 basis points at the start of August.

"One simple interpretation of the governor's comments is that it could now take an upside surprise to inflation for the MPC not to cut rates back-to-back in November and December," said Shreyas Gopal, strategist at Deutsche Bank.

"Previously the guidance suggested that the burden of proof was oninflation to surprise to the downside for such a shift away from the 'gradual' pace of easing," Gopal added.

The market reaction to Bailey's more-dovish-than-usual comments was swift, with the British pound (GBPUSD) sliding 1.1% to $1.3118 and 2-year U.K. government gilt yields BX:TMBMKGB-02Y falling 3 basis points to 3.983%, bucking the market trend on the day.

"The market has already moved to fully price in a 25 basis point cut from the BoE come November 7th [the next MPC meeting] and gives a small chance to a 50 basis point cut too," said David Stritch, currency analyst at Caxton.

"If unemployment is soft on the 15th for the U.K., the pound's bull run could simply become a September story in the rear view," he added.

London's stock market outperformed the downward trend in Europe. As the Stoxx Euro 600 index XX:SXXP fell 1% the FTSE 100 UK:UKX lost just 0.2% as interest-rate sensitive sectors like real estate and utilities found support.

Shares of London-listed housebuilders rose on hopes lower mortgage rates would lift demand for homes, with Persimmon (UK:PSN), Barratt Developments (UK:BDEV) and Taylor Wimpey (UK:TW) gaining between 1 and 2%.

Bailey also told the Guardian that the Bank was watching "extremely closely" developments in the Middle East, wary that markets are currently particularly vulnerable to increased tensions.

"It's tragic what's going on. There are obviously stresses and the real issue then is how they might interact with some still quite stretched markets in places," he said.

"From the point of view of monetary policy, it's a big help we haven't had to deal with a big increase in the oil price. But obviously we've had that experience in the past, and in the 1970s, the oil price was a big part of the story," Bailey added.

-Jamie Chisholm

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10-03-24 1009ET

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