Pound Sterling Steadier After Bailey Pushes Back Against Rate Cut Bets

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The Pound recovered from its lows after the Governor of the Bank of England pushed back at rising expectations that the Bank of England would cut rates by as early as the third quarter of 2024.

"If the market has taken from what we have published today a view that we are leaning towards more cuts, then I'm afraid I will lean against that, yes," Andrew Bailey said in a television interview that followed the November interest rate decision and guidance update.

The British Pound fell against the Euro and came off its highs against the Dollar in the wake of the Bank's decision to maintain interest rates at 5.25% and signal that further hikes were incoming.

Despite the Bank's attempts to enforce a 'higher for longer' message, financial markets raised bets for the first rate cut to be delivered by at least September 2024.

The bringing forward of rate cut expectations boosted UK bond values, thus lowering their yield, which in turn weighed on the Pound.

The Bank might have kept interest rates on hold but is still uncomfortable with any sense this is a signal that interest rates are incoming.

Such a belief inadvertently loosens UK financial conditions (falling bond yields lower the cost of money) and risks creating fresh inflationary impulses, stymying the Bank's efforts to bring inflation back to 2.0% in a timely manner.

Bailey maintained it was "much too early" to be talking about when to lower interest rates.

Although the Bank said in a statement that "monetary policy is likely to need to be restrictive for an extended period," financial market participants were on the hunt for scraps of evidence that contradicted this stance.

The decision by Bank economists to lower growth forecasts was soon sniffed out and taken as evidence by traders that the Bank's inflation forecasts might be too rich, meaning it would in fact be in a position to cut rates from the third quarter of 2023.

The Bank lowered its forecasts for growth in 2024 to 0% from 0.50%.

Traders are now fully priced for the first reduction in rates to occur in September 2024, followed by another move downward by the end of the year.

Following these developments, Bailey was adamant that "we still see the risks to inflation as being on the upside at the moment and it's important for that message not to get lost."

The Pound to Euro exchange rate was as low as 1.1446 on Thursday but has since recovered to 1.1477.

The Pound to Dollar exchange rate recorded a low at 1.2140 and has since righted itself to 1.2198.