Inflation risks skewed to the upside, warns BoE’s Bailey

The Bank of England (BoE) raised interest rates to 4% on Thursday. Following the decision, Governor Andrew Bailey acknowledged upside risks to inflation and said the central bank was “watching the extent of inflation pass-through,”.

The pace of inflation’s decline towards the BoE’s 2% target will determine future decisions, Bailey added. Resolving the US-Iran conflict “would bring limited relief from inflation.”

Key Points:

The extent of inflation pass-through remains under BoE scrutiny.

Risks to inflation are skewed upwards, though that could change.

How quickly inflation declines will determine future decisions.

Progress towards peace would offer only limited inflation relief.

The energy price cap means inflation is already embedded for now.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Pound Sterling: Today’s Currency Performance

Against the Australian Dollar, the British Pound (GBP) recorded its strongest performance today. The table below sets out its percentage moves against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.12%	0.04%	-0.30%	0.27%	0.77%	0.30%	-0.14%
EUR	-0.12%		-0.08%	-0.43%	0.15%	0.64%	0.17%	-0.26%
GBP	-0.04%	0.08%		-0.36%	0.23%	0.72%	0.27%	-0.19%
JPY	0.30%	0.43%	0.36%		0.57%	1.07%	0.58%	0.15%
CAD	-0.27%	-0.15%	-0.23%	-0.57%		0.50%	0.02%	-0.42%
AUD	-0.77%	-0.64%	-0.72%	-1.07%	-0.50%		-0.45%	-0.92%
NZD	-0.30%	-0.17%	-0.27%	-0.58%	-0.02%	0.45%		-0.42%
CHF	0.14%	0.26%	0.19%	-0.15%	0.42%	0.92%	0.42%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. To read GBP (base)/USD (quote), for instance, locate the British Pound on the left and follow that row across to the US Dollar column. The intersecting cell shows the pair’s percentage change.

BoE: Key Questions Answered

Bank of England: Its Role and Impact on the Pound

Monetary policy in the United Kingdom is set by the Bank of England (BoE). The central bank’s main objective is ‘price stability’, meaning a steady inflation rate of 2%. It pursues this by adjusting base lending rates. By setting the rates at which it lends to commercial banks and banks lend to one another, the BoE determines interest rate levels across the economy. The value of Pound Sterling (GBP) is also affected.

Sterling’s Response to Bank of England Monetary Policy

Above-target inflation prompts the Bank of England to raise interest rates, increasing borrowing costs for households and businesses. Sterling benefits because higher rates make the UK more appealing to global investors seeking a place for their funds. Conversely, inflation below target signals slower economic growth. The BoE will then consider cutting rates to reduce credit costs, hoping businesses will borrow to fund growth-generating projects. This is negative for Pound Sterling.

Quantitative Easing (QE): The Mechanism and Effect on the Pound

When conditions become extreme, the Bank of England can turn to Quantitative Easing (QE). This last-resort policy is used when interest rate cuts cannot deliver the required outcome. It substantially expands the flow of credit through a stalled financial system. Under QE, the BoE prints money to purchase assets from banks and other financial institutions, typically government bonds or AAA-rated corporate bonds. The usual result is a weaker Pound Sterling.

Quantitative Tightening (QT): The Mechanism and Effect on Sterling

As the economy strengthens and inflation begins to rise, Quantitative tightening (QT) reverses QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. Under QT, it ceases additional bond purchases and no longer reinvests principal repaid when its existing bonds mature. This generally supports Pound Sterling.