Sterling Slips as Bank of England Signals Potential Rate Cut

The Pound Sterling experienced a decline following remarks from Dave Ramsden, a member of the Bank of England Monetary Policy Committee, suggesting increased likelihood of a rate cut in June.

Ramsden’s Assessment

In a speech delivered at the Peterson Institute of International Economics in Washington, Ramsden expressed growing confidence in the reduction of risks to domestic inflation pressures, contributing to a downward tilt in UK inflation risks. He referred to recent evidence indicating a diminishing persistence in domestic inflation pressures, leading him to favor a scenario where inflation remains close to the 2% target throughout the forecast period.

Impact on Exchange Rates

The Pound to Euro exchange rate dipped by a quarter of a per cent to 1.1655 shortly after Ramsden’s remarks. Similarly, the Pound to Dollar fell by 0.20% to 1.2436.

Bank of England’s Inflation Forecasts

Ramsden referenced the Bank’s latest inflation forecasts from February, noting a shift in the balance of domestic risks to UK inflation. The Bank anticipates inflation to decline to the 2.0% target in the second quarter of 2024 before rising to approximately 3% by the first quarter of 2025. This projection is primarily attributed to the persistence in domestic inflationary pressures.

Market Reaction and Speculation

Ramsden’s comments coincide with earlier statements made by Bank of England Governor Andrew Bailey, also delivered in Washington. Bailey expressed little concern regarding this week’s inflation reading, indicating a potential divergence from the consensus. He suggested the Bank might consider initiating rate cuts before inflation reaches the 2.0% target to avoid exacerbating inflation rates.

Likelihood of Rate Cut

Analysts speculate that Ramsden’s remarks increase the probability of a rate cut in June. However, it is unlikely that the majority of the Monetary Policy Committee (MPC) will support this decision. Members Haskell and Mann recently suggested an August hike as a more probable scenario, citing concerns about premature cuts amid elevated pay levels in the UK.