The Bank of England (BoE) could adopt a more aggressive stance on interest rate cuts if inflation data continues to improve, according to Governor Andrew Bailey.
However, the escalating conflict in the Middle East poses risks to oil prices, which could complicate the central bank’s plans.
In an interview with The Guardian, Bailey suggested that the BoE might become “a bit more activist” and “a bit more aggressive” in cutting interest rates if inflation continues to show signs of easing.
This comes after recent positive inflation data, which has alleviated some of the central bank’s earlier concerns about persistent price pressures.
Sterling reacted swiftly to Bailey’s comments, dropping by nearly three-quarters of a cent against the US dollar as investors digested the possibility of faster rate cuts in the near future.
Market expectations for a quarter-point rate cut at the BoE’s November meeting surged, with rate futures pricing in a 90% chance of a reduction.
Current interest rate landscape
The BoE’s current benchmark interest rate stands at 5%, following the first rate reduction in four years in August.
While the central bank held rates steady in its most recent meeting, markets are anticipating a further 0.25% cut at the upcoming November meeting.
Bailey’s comments indicate a shift in the BoE’s approach, driven by easing inflation.
“I’m encouraged by how inflation pressures have proven less persistent than we feared,” Bailey said, while emphasizing the importance of monitoring global events that could impact inflation trends.
Middle East conflict and its impact on oil prices
While inflation trends are improving, Bailey also highlighted the risks posed by geopolitical instability in the Middle East.
Rising tensions in the region could lead to a spike in oil prices, complicating the BoE’s efforts to manage inflation and stabilize the economy.
“Geopolitical concerns are very serious,” Bailey told The Guardian.
It’s tragic what’s going on. There are obviously stresses, and the real issue then is how they might interact with some still quite stretched markets in places.
He acknowledged the global efforts to keep oil markets stable, but warned of potential volatility.
There’s a strong commitment to keep the oil market stable, but there’s a point beyond which that control could break down if things got really bad. You have to continuously watch this thing, because it could go wrong.
Investors eye November rate cut
Investors are now fully pricing in a quarter-point rate cut at the BoE’s November meeting, a sentiment that has grown stronger following Bailey’s remarks.
With inflation showing signs of slowing, the central bank may have more room to cut rates and support the economy, provided that global oil prices remain stable.
The BoE’s balancing act between domestic inflation control and external geopolitical risks will be closely watched in the weeks leading up to its November meeting.
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