Sterling slips after Bailey says BoE may be “a bit more aggressive” on rates

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The pound fell more than 1 percent against the dollar on Thursday, its biggest daily decline since March, after Bank of England Governor Andrew Bailey opened the door to a faster pace of interest rate cuts.

The bank’s organizers could be “a bit more aggressive” about lowering borrowing costs if inflationary pressures continued to ease, Bailey told The Guardian newspaper.

Sterling fell to $1.3125 in early trading, extending its decline from last week when the currency traded above $1.34.

After Bailey’s remarks were published, investors put the chance of the BoE cutting by two-quarters of a point this year at 75%, up from 50%.

Bailey’s comments challenged investor expectations that the BoE, facing persistent price pressures in the key services sector, would cut rates much more slowly than the Federal Reserve and European Central Bank.

“Given that inflation in the UK has been higher than in the US and Europe, the market has priced in a shallower cycle,” said Athanasios Vamvakidis, global head of G10 FX strategy at BofA. “But these comments suggest the BoE could go faster.”

UK inflation was steady at 2.2% in August, but services inflation, the BoE’s main measure of domestic price pressures, rose to 5.6% from 5.2% in July.

However, Bailey told The Guardian he was encouraged that cost-of-living pressures were not as persistent as the central bank thought they might be.

If the inflation news continues to look encouraging, there is a chance the BoE will become “a bit more activist” in its approach to cutting interest rates, he said.

The BoE kept interest rates at 5% last month but signaled it could cut borrowing costs as soon as November. In August, the bank cut interest rates from a 16-year high of 5.25%, its first cut in more than four years.

Bailey’s remarks came as a BoE survey published on Thursday showed UK businesses expect wages to rise by 4.1% next year.