UK Interest Rates and the British Pound: October 2024
In an interview on 3rd October 2024, the Governor of the BOE (Bank of England), Andrew Bailey, announced that the Bank could be leaning towards cutting interest rates in a more proactive fashion, providing inflation remained just above the benchmark of 2%. In October 2022, inflation stood at 11.1% due to the energy debacle the United Kingdom faced, but has come down almost to the Bank’s target figure, although the BOE does expect an increase in price growth as energy prices increase throughout the winter months.
Financial markets, after the comments by Governor Bailey, have priced in a 25 basis point interest rate cut to 4.74% at the next meeting of the MPC (Monetary Policy Committee) on Thursday 7th November 2024. With inflation currently standing at 2.2%, Andrew Bailey said the BOE could become a “bit more activist” in their approach to reducing interest rates providing the news on the pace of price rises continued to be good. The current remarks from Governor Bailey are in contradiction of the “steady as she goes” policy since the first rate cut before the beginning of the Covid-19 pandemic.
The markets continue to worry about the continuing conflicts in the middle east which could indeed drive the cost of a barrel of oil back up to USD100, which could well push up inflation. Oil prices have risen by 3% on concerns of increasing conflict in the Middle East, however Governor Bailey was quick to point out that a year ago, on the 7th of October 2023, Hamas launched their first attack on Israel there had been no significant rise in oil prices.
On the back of Governor Bailey’s remarks, the appeal of Sterling (British Pound) has slumped as financial markets had originally placed bets on quicker reduction in interest rates. The Governors remarks had a big impact on the financial markets as they were on board with his “steady as you go” policy, suggesting that the BOE would lag behind the Federal Reserve and the ECB (European Central Bank) in cutting interest rates. In fact, traders and investors had piled into bullish bets on sterling, taking advantage of various rate differentials. Data issued by the Commodities Futures Trading Commission show hedge fund wagers at their highest since 2018.
A number of financial experts are suggesting that the pounds best days are over with its rally coming to an end. The pound fell against the US Dollar by 1.1% to 1.3118, the biggest fall since March 2023, and the pound also fell by 1.1% against the Euro the most (on a closing basis) since December 2022. Governor Baileys’ remarks has certainly caught traders by surprise with many selling sterling to close out bullish positions.
