Above: Governor Andrew Bailey. Image copyright Pound Sterling Live, courtesy of Parliament.tv
The Bank of England Governor confirms he won't be bounced into panicky moves due to geopolitical uncertainty.
The British Pound found some support from Andrew Bailey's appearance before UK lawmakers on Tuesday, where he indicated there would be no rushed interest rate cuts owing to heightened global uncertainty.
He told the House of Lords economic affairs committee that the UK labour market was "softening" and that slack was "opening up", which would typically be associated with an admission that more support was needed from the central bank via the lowering of interest rates.
However he added, "my view is the path of rates is still downwards but it is going to be very gradual and very careful."
Above: GBP/USD looks set to retest fresh highs.
This is a firm commitment to the Bank's current policy of cutting rates once every quarter, which puts August into scope, ahead of another cut in December. This would be entirely in line with current market thinking.
The market entered June seeing low odds of an August rate cut, but a set of underwhelming UK data releases, chief amongst them the labour market report, pushed investors to reapraise the prospect of an August move, such that it is now fully anticipated.
This readjustment aligned with a decline in the Pound against the Euro and other major currency peers.
Above: Market-implied expectations for Bank Rate dropped notably in June as investors saw higher odds of an August cut. Image courtesy of Goldman Sachs.
For the Pound to fall further, the market would need to continue down the path of expecting more rate cuts, delivered at shorter intervals.
However, Bailey is clear that this isn't likely, as "very gradual and very careful" is consistent with the fear that current elevated levels of inflation will prove more enduring than current Bank of England forecasts suggest.
It's the Bank's assumption that inflation will fall back to 2.0% in 2026, but inflation is yet to peak in 2025, and when it does, it will be closer to 4.0% than it is to 2.0%.
Above: Inflation is moving higher again.
This risks inflation expectations staying elevated amongst consumers and businesses, which tends to result in behaviour that only further entrenches inflationary pressures.
It's something the Bank wants to avoid, and cutting interest rates too fast and too soon risks doing just that.
Bailey also said he was not putting that much "weight" in his decision-making on global events, including tariffs and conflict in the Middle East, because of how volatile the situation was.
"When I'm thinking about my decision on interest rates, because of the sheer unpredictability, it’s not that I’m ignoring the world — anything but - but I’m not putting that high a weight on it because, frankly, it is so unpredictable at the moment that, as we saw in the last 24 hours, it can easily change overnight," he said.