After a day that saw sterling drop to a record-low against the dollar and gilt yields soar, Bailey said the bank is monitoring developments in financial markets “very closely.” He said policy makers “will not hesitate to change interest rates by as much as needed to return inflation to the 2 per cent target sustainably in the medium term.”
The wild market swings are a response to sweeping tax cuts announced on Friday that investors fear will fuel inflation and increase borrowing at a time of rapidly rising interest rates. The central bank also appeared to quash speculation about an emergency move, saying it will make a “full assessment at its next scheduled meeting of the impact on demand and inflation from the government’s announcements, and the fall in sterling, and act accordingly.”
The pound fell after the statement and was down 1.8 per cent at US$1.0663 as of 4:47 p.m. in London. The currency had earlier pared its drop amid speculation a stronger statement was coming. Traders pared their wagers on BOE rate hikes after the release, pricing in about 170 basis points of hikes at the next rate decision in November from around 190 basis points before the comments.