The British Pound experienced a challenging day on Thursday, following Bank of England Governor Andrew Bailey's statement that the conclusion of the interest rate hike phase was imminent. Speaking before the Parliament's Treasury Select Committee, Bailey indicated that the UK is nearing the peak of the current interest rate cycle, sparking concerns over the Pound's performance against the Euro and the US dollar.
Bailey's comments reinforced market expectations that the anticipated 25 basis point interest rate increase in September could potentially mark the end of the current rate-hiking phase. The Pound was already under pressure prior to Bailey's remarks, which triggered a renewed wave of selling. The Pound to Euro exchange rate declined by 0.45%, settling at 1.1665, while the Pound to dollar exchange rate dropped by half a percent, testing the crucial 1.25 threshold.
Despite expectations for a 50 basis point increase in interest rates by year-end, Bailey's recent statement has cast doubts on the likelihood of a November rate hike following the one in September. This has led to diminished optimism about the Pound's performance. However, Bailey and his Monetary Policy Colleagues have signaled an intention to maintain interest rates at elevated levels for an extended period due to the UK's high headline inflation rate among developed nations.
Andrew Goodwin, Chief UK Economist at Oxford Economics, believes persistent inflation will delay the first rate cut until summer 2024, later than both the Federal Reserve and European Central Bank. High wage growth suggests that the Bank of England will likely maintain a restrictive monetary policy.
Barclays (LON:BARC) Bank recently revised its outlook on the Pound sterling, expressing less optimism, particularly compared to the Euro, Dollar, and Swiss Franc. Barclays Bank analyst Themistocles Viotakis noted signs of slowing consumer demand and labor market, leading to less optimism about the sterling Pound. Despite this revision, Barclays' projections do not foresee a significant decline in the value of the Pound.
During his appearance before members of Parliament on Wednesday (6 September), Bailey discussed inflation figures for August which may be slightly higher than forecast due to an increase in petrol prices but emphasized the inflationary path will continue to be downward.
In addition to this, Bank of America (NYSE:BAC) recently forecast that the Bank of England will increase rates to 5.5% and hold them at that level through 2024. The upcoming decision on this matter by BoE's Monetary Policy Committee is scheduled for 21 September.
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