The British pound plunged to a three-week low after Bank of England Governor Andrew Bailey suggested the central bank could speed up interest rate cuts if the UK’s labor market continues to weaken. The pound initially dropped sharply to $1.3467 against the dollar before staging a modest recovery later in the day.
Bailey painted a bleak economic picture, highlighting growing slack in the UK economy and pointing to increased employer tax burdens as a key factor behind the slowdown. Despite the Bank’s previous emphasis on a cautious approach, Bailey’s clear conviction about further rate reductions from the current 4.25% level resonated with investors, especially after four consecutive quarter-point cuts over the past year.
The economic backdrop remains troubling, with official data showing unexpected GDP contractions in both April and May. These figures have intensified concerns about the UK’s economic resilience, while a recent KPMG report revealed the steepest decline in business hiring in nearly two years, underscoring labor market challenges.
Financial markets reacted decisively, with money markets now pricing in an 85% probability of a rate cut in August, up from 76% a week earlier. This shift comes as the government faces mounting pressure to address falling living standards and stubbornly high inflation, which remains above the BoE’s 2% target.