Pound Plunges as BoE Signals Deeper Rate Cuts Amid Job Market Woes

The British pound experienced a significant drop, reaching a three-week low, following remarks from Bank of England Governor Andrew Bailey. Bailey indicated that the central bank is prepared to implement more substantial interest rate cuts if the UK’s job market experiences a more rapid slowdown than anticipated. This prospect of accelerated easing fueled investor concerns, leading to the currency’s depreciation.
Bailey highlighted an emerging “slack” in the UK economy, attributing it partly to the increased tax burden on employers. He expressed confidence in a downward trajectory for interest rates, currently at 4.25% after four quarter-point reductions in the past year. However, he emphasized a “gradual and careful” approach, acknowledging public queries given that inflation remains above the 2% target.
The pound initially slipped 0.2% against the dollar, trading at $1.3467, its lowest since June 23. While it recovered slightly later in the day, remaining down 0.18% at $1.3474, the market reacted strongly. Investors also adjusted their expectations for an August rate cut, with money markets now indicating an 85% chance, up from 76% at the end of last week, reflecting heightened anticipation of monetary easing.
This potential for lower rates and reduced inflation comes as the government faces mounting pressure to improve living standards amidst a weakening economy. Recent official data revealed unexpected contractions in GDP for both April and May, underscoring the economic challenges. Moreover, a recent report from KPMG indicated the fastest drop in UK business hiring in almost two years, further supporting the central bank’s concerns about the labor market.