Andrew Bailey, Governor of the Bank of England, offered some optimism to millions of UK mortgage holders during his speech at the Jackson Hole conference on Friday. Bailey hinted that interest rate cuts might happen sooner than expected. This comes as welcome news to those affected by the recent hikes in borrowing costs. The Bank of England has been closely monitoring inflation, which has driven up interest rates in an effort to curb rising prices across the economy.
Bailey pointed out that inflation appears to be easing faster than initially feared. He noted that the factors keeping prices high are less persistent than previously anticipated. This shift could signal a more rapid return to lower interest rates, providing some relief for households and businesses alike. However, the BoE remains cautious, continuing to assess the economic data before making any final decisions on rate cuts.
Andrew Bailey also issued a word of caution, underscoring the importance of not becoming complacent despite recent signs of improvement in the inflation outlook. He made it clear that the Bank of England still has to be cautious in its approach, as their work is far from over. Bailey noted that while progress has been made in curbing inflation, they are not yet back to their target rate on a sustained basis, which remains a critical goal for the central bank. This ongoing challenge means that careful consideration will be needed in their next steps.
This warning comes just a month after the Bank of England implemented its first rate cut in four years, reducing the base rate from 5.25% to 5%. The decision was seen as a positive move for mortgage holders and businesses alike, but Bailey’s comments suggest that the central bank is aware of the risks of acting too quickly. He indicated that, while the recent rate cut was necessary, there is still more to be done to ensure long-term stability in the economy, and that the path forward will require a balanced and measured approach.
Monetary policy will need to stay restrictive for an extended period until the risks of inflation staying above the 2% target in the medium term have further diminished. The approach will remain steady to ensure that inflation is brought under control and kept at the desired level.
This statement comes as Jerome Powell, Chair of the Federal Reserve, hinted at a possible US interest rate cut next month. Powell mentioned that “the time has come for policy to adjust,” signalling a shift in the Fed’s stance. He added that the direction is set, but the timing and pace of rate reductions will depend on incoming data, the changing economic outlook, and the balance of risks. Powell’s remarks were made during the economic conference in Wyoming.
Four and a half years after the onset of COVID-19, the most severe economic disruptions caused by the pandemic are starting to recede. Inflation has decreased significantly, and the labour market, once overheated, is now in a more stable state. Conditions in the job market are less strained than they were before the pandemic.
These comments should bring some relief to financial markets, which experienced significant declines in early August after the Federal Reserve decided to maintain interest rates and was followed by a series of disappointing economic reports.
In response to this news, the pound strengthened to its highest level in over two years, while the dollar fell. The sterling rose by 0.83% to $1.3197, reaching its peak since late March 2022 and surpassing a previous 13-month high of $1.3144.
Recent updates from CME FedWatch show that traders have made slight adjustments to their expectations for the upcoming Federal Reserve meeting on 18 September. Currently, the market is leaning towards a potential 0.5 percentage point rate cut, although the prevailing consensus still leans towards a more modest 0.25 percentage point reduction.
At present, the probability of a 0.25 percentage point cut stands at 67.5%, which marks a decrease from the earlier figure of 71.5%. These probabilities are determined through the analysis of derivative trading activities, which reflect market participants’ expectations and sentiment. The shift in expectations highlights the ongoing uncertainty and varying opinions among traders regarding the future direction of interest rates.
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