Bailey speech: Latest decline in oil prices offers welcome news

With the policy rate raised by 25 basis points (bps) to 4% following the November meeting, Bank of England (BoE) Governor Andrew Bailey outlines the policy outlook and takes questions from the press.

What are the key takeaways?

"Market curve prices further restrictiveness into next year, but this largely reflects risk premia, not expected rates, this seems fair reflection of energy risks."

"Latest fall in oil prices is positive news."

"Unless there is progress towards resolving conflict, further increase in bank rate may be warranted."

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

"Good news on Iran conflict would reduce risk of further inflation pressures, could lead to CPI peak somewhat below 5%."

"Had we known what would happen in last 48 hours, rate decision would still have been the same."

"If we do see a peace process, that would be a good thing and lower energy prices."

BoE: Common questions answered

What is the Bank of England’s role, and why does it matter for the Pound?

Maintaining ‘price stability’, defined as a steady inflation rate of 2%, is the main objective of the Bank of England (BoE), which sets monetary policy for the United Kingdom. To pursue this objective, it adjusts base lending rates. By setting the rate for its lending to commercial banks and for lending between banks, the BoE determines the broader level of interest rates across the economy. The value of the Pound Sterling (GBP) is also affected by these decisions.

Why do the Bank of England’s monetary policy decisions affect Sterling?

Higher interest rates support the Pound Sterling by making the UK a more attractive destination for international investors’ funds. The Bank of England raises rates when inflation exceeds its target, increasing borrowing costs for households and businesses. Conversely, below-target inflation signals slower economic growth. In that situation, the BoE will consider cutting rates to make credit cheaper, hoping to encourage businesses to borrow for projects that drive growth. Such a move is negative for the Pound Sterling.

How does Quantitative Easing (QE) work, and what does it mean for the Pound?

When interest 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, typically government bonds or AAA-rated corporate bonds. A weaker Pound Sterling is the usual result of QE.

Why can Quantitative tightening (QT) support the Pound Sterling?

As the economy gains strength and inflation begins to rise, Quantitative tightening (QT) reverses the process of QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. Under QT, it ends further bond purchases and no longer reinvests principal repaid as bonds in its existing holdings mature. The policy is generally supportive of the Pound Sterling.