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BoE’s Bailey warns risks to inflation are skewed to the upside
Following Thursday’s increase in interest rates to 4%, Bank of England (BoE) Governor Andrew Bailey acknowledged that inflation risks were skewed to the upside. He said the central bank was “watching the extent of inflation pass-through,”.
The pace at which inflation falls towards the BoE’s 2% target will determine future decisions, Bailey added. A resolution of the US-Iran conflict, he said, “would bring limited relief from inflation.”
Bailey sets out the main points:
The extent to which inflation feeds through remains under BoE scrutiny.
The balance of inflation risks is tilted upwards, although that could change.
The speed of the decline in inflation will determine subsequent decisions.
Steps towards peace would offer only limited relief from inflation.
The energy price cap means inflation is currently embedded.
Pound Sterling Records Its Strongest Performance Against the Australian Dollar Today
Today’s percentage movements in the British Pound (GBP) against the major currencies listed appear in the table below. Sterling’s strongest performance was against the Australian Dollar.
| 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, select the British Pound on the left and follow its row across to the US Dollar column; the figure in that cell gives the percentage change.
BoE policy and its effects explained
Responsibility for the United Kingdom’s monetary policy rests with the Bank of England (BoE). Achieving ‘price stability’, defined as a steady inflation rate of 2%, is its principal objective. To pursue that goal, it adjusts base lending rates. By setting the rate at which it lends to commercial banks and at which banks lend to one another, the BoE determines the broader level of interest rates across the economy. The value of the Pound Sterling (GBP) is also affected.
Inflation above the Bank of England’s target prompts an increase in interest rates, raising borrowing costs for households and businesses. Sterling benefits because higher rates make the UK a more attractive destination for international investors’ money. By contrast, below-target inflation signals slowing economic growth. The BoE will then consider cutting rates to make credit cheaper, hoping to encourage businesses to borrow and invest in projects that generate growth. This is negative for the Pound Sterling.
When rate cuts cannot deliver the required outcome, the Bank of England can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. This policy substantially expands the flow of credit through a stalled financial system. To carry it out, the BoE prints money and purchases assets from banks and other financial institutions, generally government bonds or AAA-rated corporate bonds. A weaker Pound Sterling is the usual result of QE.
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 further bond purchases and no longer reinvests the principal repaid as its existing bond holdings mature. This is generally supportive of the Pound Sterling.
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