Pound Sterling: Bank of England's Bailey Talks Rate Cuts

Above: Governor Andrew Bailey at a Treasury Select Committee appearance. Image copyright Pound Sterling Live, courtesy of Parliament.tv

Pound Sterling extended its short-term decline against the Euro but was steadier against a broadly weaker Dollar after the Bank of England Governor Andrew Bailey said the bank could cut interest rates before inflation fell to the 2.0% target.

The Pound to Euro exchange rate has been under mild pressure this week and saw losses extend to 1.1670 after Bailey told a committee of parliamentarians that the Bank doesn't need inflation to be back at the 2.0% target before cutting rates.

The Pound to Dollar exchange rate gained through the London morning session and held the advance above 1.2610; moves here have more to do with a retracement in the 'big dollar' as it catches a breather following an already stellar performance in 2024.

Bailey's admission encouraged markets to firm bets that the Bank would cut interest rates as soon as June. Bailey made the comments before the Treasury Select Committee and appeared alongside fellow Monetary Policy Committee (MPC) members Swati Dhingra and Megan Greene.

The Governor was careful not to encourage a massive repricing in rate cut expectations, saying the economic recession of the second half of 2023 was not a major cause of concern.

"If you look at recessions going back to the 1970s, this is the weakest by a long way. -0.5% is a very weak recession," he said.

Pound Sterling has enjoyed a strong start to the year as market expectations for an early Bank of England rate cut receded, but this repricing came to an end after last week's inflation print for January showed inflation came in at levels below where markets and the Bank of England expected.

Inflation is expected to fall to around the 2.0% target in April as the impact of a cut to household energy bills comes through, but the Bank expects it to return towards 3.0% by year-end.

Bailey argues that this expectation means the Bank must be vigilant and not rush the rate-cutting process.