Governor Andrew Bailey suggested in an interview with The Guardian newspaper, published online on Thursday, that the Bank of England could move a “bit more aggressively” on interest rate cuts, causing the pound to tumble to a near three-week low.
In August, the BoE cut its benchmark rate by a quarter-point, marking the first drop since March 2020. In a 5-4 vote, the bank reduced the interest rate to 5.00 from a 16-year high.
UK inflation has returned from its highs and is now at 2.2%, slightly higher than the target of 2 percent. More favorable inflation developments could cause the bank to become “a bit more activist” in its rate-cutting attitude, according to Bailey.
He noted that the cost-of-living crisis has not lasted as long as the bank had anticipated.
Shortly after the interview was published, the pound fell substantially versus the dollar and the euro, as markets expected the BoE to steadily reduce interest rates.
Bailey also stated that the UK central bank is closely monitoring developments in the Middle East, adding that geopolitical tensions are “very serious”. He warned that if the crisis worsens, oil prices could be destabilized.
“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,” the governor of the Bank of England said.
Bailey referred to previous experiences, particularly those from the 1970s when he said that central banks are keeping a careful eye on developments to assess the impact of recent news, and they are firmly committed to maintaining market stability.
“There’s also recognition there’s a point beyond which that control could break down if things got really bad,” Bailey stated. “You have to continuously watch this thing because it could go wrong,” he added.
The head of the BoE stated, “I think the economy has come through the shocks of the last five years better than many of us feared,” in reference to economic growth. So there’s a base there to develop.”
Final Thoughts
Governor Andrew Bailey’s remarks suggest that the Bank of England is leaning toward a more aggressive approach to interest rate cuts, signaling a shift in its monetary policy outlook. With UK inflation now hovering slightly above the 2% target, Bailey’s openness to deeper cuts reflects the bank’s confidence that inflation is under control.
However, this stance also highlights a cautious optimism that the UK economy has weathered the cost-of-living crisis better than anticipated. The immediate drop in the pound following his statements indicates market concerns that faster rate cuts may undermine the currency’s value, especially against the backdrop of global uncertainties.
Bailey’s comments on the Middle East geopolitical tensions also point to the central bank’s awareness of the broader risks to global economic stability, particularly regarding oil prices. His warning about potential destabilization echoes the importance of external factors in shaping the BoE’s future actions.
While the bank has so far avoided major oil price shocks, Bailey’s acknowledgment of the 1970s crises serves as a reminder that the current stability could be fragile if global events worsen. This dual focus on domestic inflation control and external geopolitical risks highlights the delicate balance the BoE must maintain in its policy decisions moving forward.