Andrew Bailey suggested that the Bank of England said the pound fell sharply on Wednesday if inflation dropped further, highlighting the vulnerability of the UK economy.
The governor said borrowing costs could “fall further” and that Sterling would drop to $1.34 against the dollar, although any cuts would depend on the outlook for inflation. “It will depend on the path to the decline in inflation,” Bailey said in an interview with the West Midlands.
His words immediately frightened currency traders, who saw an opportunity to lower interest rates more and more. The pound has remained more than 7% strong against the dollar since January, but this week’s weakness reflects fears that the UK’s recovery is shaking.
Bailey pointed out that soft consumer demand is a key resistance. “People are very cautious right now. Of course, this affects spending… People don’t go out that way; they don’t shop much; they don’t go to restaurants and so on.”
Comments followed grim data, showing retail sales in the UK last month were 2.1% below pre-pandemic levels, while GDP was parallel in July. Meanwhile, inflation proved to be stubborn, with inflation rates of 3.8% in July and August, the highest in 19 months. The Bank of England is expected to peak at 4% in September.
The market is widely expected that central banks will hold a 4% tax rate for the rest of the year, but Bailey’s tips that if inflation compensation adds new uncertainty, the cuts could be on the table.
Government borrowing costs have barely moved, with a steady 30-year gold plating yield of 5.5%. In violation of the euro, Sterling rose to 1.14 euros at 0.06% since the beginning of the year, but fell by 5%.
