The pound dropped sharply after the Bank of England’s governor signalled the possibility of more aggressive interest rate cuts if inflation continues to cool, amidst concerns over the Middle East crisis and its potential impact on oil prices.
UK Pound Sinks as BoE Hints at More Aggressive Rate Cuts on the Horizon
By Arezki AMIRI
Published on 3 October 2024 13:04
The British pound experienced a significant decline following comments from Andrew Bailey, the Governor of the Bank of England, indicating that the central bank could adopt a more aggressive approach in cutting interest rates if inflation continues to ease.
In an interview with The Guardian, Bailey expressed optimism about inflation trends, while also voicing concern over potential risks stemming from the ongoing Middle East conflict and a possible spike in oil prices.
UK Pound Reacts to Bailey's Comments
After the publication of Bailey’s interview, the pound dropped by 1.5¢ against the US dollar, trading at approximately $1.31, its lowest point in three weeks. The pound had already been under pressure throughout the week, and Bailey's comments accelerated the decline.
Analysts, including Kathleen Brooks, research director at XTB, highlighted that the market interpreted Bailey's remarks as a clear signal to anticipate further interest rate cuts.
Rate Cut Expectations Increase
Investors now anticipate that the Bank of England will resume cutting interest rates at its November policy meeting, with financial markets pricing in a potential quarter-point reduction to 4.75%. This comes after the central bank reduced rates in August for the first time since the pandemic, followed by a pause in September.
Bailey’s interview hinted that the bank may take a more active stance on reducing borrowing costs if inflation continues its downward trajectory.
Currently, inflation stands at 2.2%, slightly above the bank’s target of 2%. Bailey emphasized that if positive inflation news continues, the bank could take a more “activist” approach in cutting rates.
However, there are growing concerns over escalating tensions in the Middle East, particularly regarding Israel and Iran, which could trigger a surge in oil prices. A rise in oil prices could reignite inflationary pressures, complicating the central bank's efforts to manage price stability.
Geopolitical Tensions are Running High
Bailey acknowledged the serious impact of geopolitical tensions, especially the risk of higher oil prices disrupting global markets. He cited the recent conflict involving Israel’s invasion of southern Lebanon and Iran’s retaliatory missile strikes as potential triggers for instability.
Oil prices have already risen by 3%, with fears that the situation could worsen if the conflict escalates, putting further pressure on global oil supplies.
Reflecting on the past, Bailey noted that although oil prices have remained relatively stable over the past year, the 1970s saw how geopolitical shocks could cause inflation spikes.
He stressed that the central bank is closely monitoring the situation, while cautioning that further deterioration in the region could destabilize oil markets and undermine recent inflation gains.