Governor Bailey’s comments triggered a sharp drop in the pound on Thursday, losing over 1% to 1.3116 against the dollar.
In an interview with the Guardian, Bailey indicated that the Bank of England might take a more aggressive stance on cutting interest rates if inflation continues its downward trend. With inflation currently just above the 2% target at 2.2%, Bailey’s suggestion that rates could be lowered more quickly caught traders off-guard, sparking a sell-off in sterling.
Bailey mentioned his optimism over inflation not being as persistent as expected, stating that the economy has proven more resilient than anticipated over the past two years. This potential shift towards faster rate cuts now depends heavily on how inflation behaves in the coming months.
Goldman Sachs analysts noted that without additional economic data, it’s hard to fully understand whether Bailey’s tone marks a significant shift. They speculate that ‘more aggressive’ might mean consecutive 25 basis point cuts, aligning with their economists’ expectations.
Despite this downturn, the pound remains the top performer in the G10 currency markets this year.
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