Bank sends pound tumbling... again

As Bailey insists interest rates will not rise as much as feared:

THE pound slumped yesterday as the governor of the Bank of England poured cold water on interest rate expectations.

Sterling slid around 2pc towards $1.11 as Andrew Bailey said markets were wrong to believe rates would peak as high as 5.25pc next year.

His comments came as the Bank raised rates by a mammoth 0.75 percentage points to 3pc, the largest hike in more than 30 years.

But in a warning to traders who were expecting more bumper hikes, Bailey suggested the unprecedented speed of rate hikes would soon begin to slow. He said: ‘ We can’t make promises about future interest rates, but based on where we stand today we think Bank Rate will have to go up by less than currently priced in financial markets.’

The Bank has been lifting rates since last December, from their record low of 0.1pc, in an attempt to cool redhot inflation. Higher rates should keep a lid on prices by encouraging saving rather than spending - but they also ramp up the cost of mortgages and other debts and put a brake on economic growth.

In the latest report from its ninestrong Monetary Policy Committee (MPC), the Bank said taking rates to 5.25pc would drag out the recession – which it thinks began in the third quarter of this year – for two years.

Unemployment, meanwhile, would almost double to 6.5pc.

The Bank presented an alternative scenario, however, in which rates stayed at the current level of 3pc. It said this would be enough to bring inflation down from its 40year high of 10.1pc towards its target of 2pc in the next two years.

Inflation would then fall below 1pc after three years.

In more normal times, that could suggest the Bank was close to being done with interest rate rises, given its mandate to hit a 2pc inflation target.

Kallum Pickering, an economist at Berenberg, said the Bank ‘may need to do much, much less than the market expects in terms of further rate hikes to return inflation to its 2pc target’. Bailey’s decision to take on the markets sent the pound tumbling. This was just the latest example of the governor of the Bank butting heads with investors.

In late 2021, when inflation was already beginning to mount, the Bank failed to hike rates as expected. The lack of action led to accusations that Bailey had ‘bottled it’, as traders had interpreted his earlier comments as a sign that a rate hike was nailed on. The pound slid by more than 2pc.

Yesterday’s clash with traders again pulled down the value of sterling, which would usually rise on news of higher rates as traders shift to a currency promising greater returns. It is now at its lowest point since before Kwasi Kwarteng was sacked in mid-October following a disastrous six-week stint as Chancellor.

The pound has also been dragged down by the US Federal Reserve, which has been more aggressive than the Bank in its fight against inflation. The Fed has hiked rates by the unusually high amount of 0.75 percentage points at its last four meetings, taking its base rate to a range of 3.75 to 4pc and causing traders to flock to the dollar.

While the Bank of England said its own base rate was unlikely to hit 5.25pc, it conceded it was also unlikely to remain at 3pc. Bailey said: ‘Where the truth is between the two, we’re not giving guidance on that.’

Analysts said Threadneedle Street would be worrying about what other unpleasant surprises could be in store – especially regarding gas prices, which have been a key driver behind rising prices.

Philip Shaw, an economist at Investec, said rate- setters also had little idea what Chancellor Jeremy Hunt would announce in his Autumn Statement later this month, and whether there would be any further help for households which could fuel inflation.