On Wednesday, the British pound dropped to its lowest point in three months. This came after Andrew Bailey, the Bank of England's governor, questioned whether it was necessary to keep raising interest rates. The pound sank by 0.6% against the dollar, landing at $1.249. Bailey's comments suggest that the UK economy is nearing its peak, based on current data.
Bailey also noted that the financial landscape has changed. Previously, it was obvious that interest rates would need to go up; the only question was by how much. "We're not in that place anymore," he said. However, he clarified that he wasn't giving any official guidance before the next key meeting on monetary policy on September 21.
In August, the Bank of England hiked interest rates to 5.25%. Financial experts are predicting that the rates will go up twice more, peaking at 5.75%, before they start to come down again in 2024. Bailey stated that the Monetary Policy Committee (MPC), which decides on interest rates, now faces a trickier decision: should they increase rates further or maintain the current rate for a longer period?
Bailey added that much of the decision will depend on how the job market is performing. He acknowledged that strong wage negotiations have so far defied the committee’s expectations, but indicated this could soon shift. “With inflation rates dropping, we'll have to see if this affects how strongly people negotiate their wages,” he said.
Sir Jon Cunliffe, the Bank’s Deputy Governor for Financial Stability, also shared his views. He said that he would be carefully considering whether the current inflation trends are likely to continue, and that too will be influenced by what’s happening in the job market. “We're starting to see some cooling in the labour market,” Cunliffe noted.
