Bailey speech: Too early to form strong views on the strength of 2nd round effects
Bank of England (BoE) Governor Andrew Bailey is participating in a moderated discussion at the Institute of International Finance Annual Membership Meeting in Bangkok, Thailand, on Friday.
Key quotes
Above-target UK inflation remains enormously frustrating.
Too early to form strong views on the strength of 2nd round effects.
So far signs of 2nd round effects are subdued, businesses emphasising cost cutting.
UK economy more resilient than we expected, not as strong as we need.
I'm more hopeful than a month ago that we will get more international alignment on AI testing.
Market reaction
At press time, GBP/USD is trading modestly near 1.3280, with the British Pound (GBP) little impressed by these comments.
Bailey flags frustrating UK inflation but second-round risks still contained
FXS Speechtracker scores the speech at 6.2/10, slightly below Governor Bailey’s historic 6.4/10 baseline, pointing to a mildly softer impact than usual. Bailey’s emphasis that above-target UK inflation remains “enormously frustrating” and that the economy is “more resilient than we expected, not as strong as we need” leans modestly hawkish, keeping the door open for sustained policy vigilance on the Pound.
However, Bailey’s comment that it is “too early to form strong views on the strength of 2nd round effects” and that signs so far are “subdued” with businesses focused on cost-cutting, tempers the hawkish tone, suggesting limited immediate pressure for aggressive tightening. The remark that news from the Middle East is the biggest factor moving UK gilt yields highlights that external geopolitical risks, rather than domestic demand, are driving market moves, which slightly dilutes the speech’s overall hawkishness for the Pound.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
