The British pound slid to a three-week low after Bank of England Governor Andrew Bailey hinted at the possibility of faster interest rate reductions if the UK labor market continues to weaken. Bailey’s remarks, seen as dovish by market watchers, triggered a sharp reaction in currency markets, with sterling initially dropping to $1.3467 against the dollar before a slight rebound.
Bailey attributed the economic slowdown to growing slack in the UK economy, citing increased employer tax burdens as a key factor. Despite a cautious approach, he expressed confidence that interest rates, currently at 4.25%, would keep moving downward, following four consecutive quarter-point cuts over the past year.
Investor sentiment has soured amid recent GDP figures showing contractions in both April and May, raising concerns about the UK’s economic outlook. A new KPMG report further highlighted the steepest drop in business hiring activity in nearly two years, reinforcing the Bank’s worries about labor market conditions.
Money markets now price in an 85% chance of a rate cut in August, up from 76% a week ago. This comes as the government faces increasing pressure to address falling living standards and persistent inflation above the 2% target.
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