Market turmoil erupted as Bank of England Governor Andrew Bailey indicated the central bank’s willingness to quicken the pace of interest rate reductions if the UK’s job market faces a more severe downturn than currently projected. The pound’s immediate response saw it fall to $1.3467, its weakest level in three weeks, though it managed to recover some ground during later trading sessions.
The Governor’s assessment highlighted the emergence of economic slack within the UK economy, pointing to increased tax burdens on employers as a key driver of the current slowdown. Despite the Bank’s preference for measured policy implementation, Bailey’s confidence in the continued downward movement of interest rates from their present 4.25% level has captured investor attention, building on four previous quarter-point cuts over the past year.
Economic fundamentals have provided strong support for the Bank’s increasingly accommodative approach, with GDP data revealing unexpected contractions in consecutive months during April and May. These figures have amplified concerns about the UK’s economic trajectory, while independent research showing the sharpest drop in business hiring activity in almost two years has reinforced fears about employment market deterioration.
The market’s response has been swift and decisive, with traders now assigning an 85% likelihood to an August rate cut, representing a notable increase from the 76% probability calculated at the end of the previous week. This evolving sentiment comes as the government faces mounting pressure to address declining living standards while managing inflation that remains stubbornly above the Bank’s 2% target.
