Pound Sterling Advances against Euro and Dollar Following Bailey Comments

Above: File image of Andrew Bailey. Edited from original @ Association of British Insurers, reproduced under Creative Commons Licensing.

The British Pound trades higher against the Euro and Dollar after the head of the Bank of England was hesitant to greenlight a faster pace of interest rate cuts.

Speaking in Washington, Bank of England Governor Andrew Bailey said that "disinflation is happening I think faster than we expected it to, but we have still genuine question marks about whether there have been some structural changes in the economy."

That disinflation is happening faster would typically be consistent with a signal that the Bank might step up the pace as it cuts rates, which would weigh on GBP exchange rates.

However, the qualifications offered by the Governor are important and push back against this outcome; mention of "genuine question marks" suggests the Bank will maintain caution. 

In addition, Bailey also warned that services inflation (4.9% y/y in September) is still higher than consistent with the target, and the labour market was "probably loosening but still tight."

The Pound to Euro exchange rate is trading a quarter of a per cent higher at 1.2013 on Thursday as markets reflect on a still-cautious Bank of England. The Pound to Dollar exchange rate is higher by a similar margin at 1.2957.

"Bailey said disinflation is happening faster than officials had anticipated in a hint the central bank may continue lowering rates next month. Despite the development on inflation and cooling wage growth, traders have been more hesitant on betting the BoE cut rates in both November and December," says George Vessey, FX analyst at Convera.

He notes interest rate expectations haven't budged too much following Bailey’s comments, which means a December rate cut following next month's 25 basis point cut is still a toss-up.

The Pound fell earlier in the month when Bailey said the Bank could be "more activist" in cutting interest rates if inflation warranted.

This was seen as a signal the Governor was shifting stance. However, his latest guidance reflects ongoing caution, which can buffer Sterling.