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Sterling fell to a three-month low on Wednesday after Bank of England Governor Andrew Bailey cast doubt on the need for further rate hikes.
Sterling was down 0.6% on the day at $1.249 after Bailey told MPs that the UK economy was “very close to the top of the cycle on the basis of the evidence so far”.
The Bank of England Governor said the economy had “come out of a period…”. . . It is clear that interest rates need to rise going forward, the question is how much”. He added: “We are not in that place anymore. ”
But Bailey stressed that he would not provide guidance until the next Monetary Policy Committee meeting on Sept. 21. The Bank of England raised interest rates to 5.25% in August.
Financial markets expect the central bank to hike rates twice, with rates peaking at 5.75% before gradually falling in 2024.
Bailey and other Monetary Policy Committee officials said the committee needs to choose between further rate hikes or keeping rates at current restraint levels for an extended period. “The judgments are much more nuanced now (than before),” Bailey said.
He added that the decision would depend largely on the extent to which the labor market cools.
Bailey admitted the committee had been surprised by the strength of the wage negotiations so far. But that could change soon, he added.
“Headline inflation has come down. We’ll see if inflation expectations continue to fall and (whether) that will be reflected in wage negotiations,” he said.
Sir Jon Cunliffe, deputy governor for financial stability, added that when deciding his position at the September meeting, he would carefully consider whether price increases persisted – and that would depend on the labor market.
“We’ve clearly reached a point where headline inflation has come down and we’re starting to see some shifts in the labor market — a cooling,” Cunliffe said.
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