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

Upside inflation risks remain a concern, Bank of England (BoE) Governor Andrew Bailey acknowledged after the BoE increased interest rates to 4% on Thursday. He said the central bank is “watching the extent of inflation pass-through,” as it assesses price pressures.

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.”

What are the key takeaways?

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.

Only limited inflation relief would come from moves towards peace.

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

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

How Is Pound Sterling Performing Today?

Against the Australian Dollar, the British Pound recorded its strongest performance today. The table below sets out the British Pound’s (GBP) percentage changes 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. For instance, choosing the British Pound on the left and following its row across to the US Dollar gives the percentage change for GBP (base)/USD (quote) in the corresponding cell.

BoE: Frequently Asked Questions

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

Responsibility for the United Kingdom’s monetary policy rests with the Bank of England (BoE). The central bank’s main objective is ‘price stability’, meaning a stable inflation rate of 2%, which it pursues by adjusting base lending rates. By setting the rates at which it lends to commercial banks and at which banks lend to one another, the BoE determines interest-rate levels across the economy. These decisions also influence the value of the Pound Sterling (GBP).

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

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

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

A weaker Pound Sterling is usually the outcome of Quantitative Easing (QE), a policy the Bank of England can introduce in extreme circumstances. Used as a last resort when interest-rate cuts cannot deliver the required result, QE substantially expands credit flows 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.

How does Quantitative tightening (QT) work, and why does it affect the Pound Sterling?

Usually supportive of the Pound Sterling, Quantitative tightening (QT) reverses QE and is introduced as the economy strengthens and inflation begins to rise. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. Under QT, it halts further bond purchases and no longer reinvests the principal repaid when bonds in its existing portfolio mature.