BoE’s Bailey: Rate cuts this year are not unreasonable
The Bank of England (BoE) governor Andrew Bailey indicated on Friday that markets can anticipate more than one interest rate cut this year, saying he is increasingly confident inflation is heading towards the target, per the Financial Times.
Key quotes
“All our meetings are in play, we take a fresh decision each time.”
“The global shocks are unwinding and we are not seeing a lot of sticky persistence coming through at the moment. That is the judgment we have to keep coming back to.”
“Need to have confidence that wages are heading in the right direction.”
“Don't need to wait for inflation to drop to 2% before cutting rates.”
“Recent economic developments are obviously good news.”
“The job on inflation is not done but what we are seeing is encouraging.”
Market reaction
At the time of writing, GBP/USD is trading at 1.2636, losing 0.19% on the day.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.