(Bloomberg) — Bank of England Governor Andrew Bailey has held out the prospect of the central bank becoming more proactive in cutting interest rates, provided inflation stayed subdued.
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In an interview with the Guardian, Bailey said he was encouraged by the fact that cost-of-living pressures were not as persistent as the BOE feared they might be.
He told the newspaper that the BOE could become a “bit more aggressive” and “a bit more activist” in its approach to cutting rates if the news on inflation continued to be good. The pound fell and investors added to bets on policymakers cutting interest rates further this year.
The comments mark a shift from the steady-as-she-goes tone adopted since the BOE cut rates in August for the first time since the pandemic. Bailey himself has called for a “gradual approach” to reversing the bank’s most aggressive tightening in decades.
Inflation has fallen from double digits in the wake of the energy price shock and now stands at just above the 2% target. The BOE is expecting price growth to pick up temporarily this year on the back of higher energy prices.
Services inflation and wage growth, being closely monitored by the BOE for signs of underlying pressures, have also eased, though remain above levels that the BOE is comfortable with.
The pound slumped more than 1% against both the dollar and the euro in the wake of Bailey’s comments, with sterling poised for its worst day versus the common currency since 2022.
The swap market is now fully pricing a quarter-point cut in November and assigning a 70% probability to a consecutive reduction in December — up from about 40% on Wednesday. Gilts are rallying in tandem, with two-year rates — those most sensitive to interest-rate policy — falling as much as 7 basis points.
It came as the BOE’s survey of chief financial officers released Thursday showed inflation expectations easing further, with firms expecting consumer prices to rise 2.6% in the coming year. The figure, a three-month average, was the lowest since the BOE began records in 2022. The Decision Maker Panel data also showed expectations for businesses’ own prices and wages were largely stable.
Bailey told the Guardian that the BOE is watching developments in the Middle East “extremely closely” amid fears of a fresh oil price shock. Oil prices are up for a third day as traders assess supply risks, with Israel expected to make a retaliatory strike against Iran following Tehran’s missile barrage earlier this week.
The region accounts for about a third of global supply, and traders are concerned the latest escalation could hit flows if energy facilities are attacked or supply routes blocked.
“Obviously, we keep watching it. We watch it extremely closely to see the impact of the latest news. But … my sense from all the conversations I have with counterparts in the region, is that there is, for the moment, a strong commitment to keep the market stable,” Bailey said.
“There’s also recognition there’s a point beyond which that control could break down if things got really bad. You have to continuously watch this thing, because it could go wrong.”
–With assistance from Alice Gledhill.
(Adds BOE survey on inflation expectations, market update)
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