The pound rose to a two-year high against the dollar, after the Bank of England governor said he was “cautiously optimistic” over easing inflation but added it was “too early to declare victory”.
Sterling lifted 0.4% to $1.3237, making it the best-performing G-10 currency.
While the FTSE 100 was up 0.3% to 8,352.63 in afternoon trading, as the UK market got its first chance to react to Andrew Bailey’s comments on Friday evening following the Bank Holiday.
The UK central bank head said: “Policy setting will need to remain restrictive for sufficiently long until the risks to inflation remaining sustainably around the 2% target in the medium term have dissipated further. The course will therefore be a steady one.”
He added: “Recent experience leads me to be cautiously optimistic that inflation expectations are better anchored as a result of the regimes we have in place.
“Second round inflation effects appear to be smaller than we expected. But it is too early to declare victory.”
Bailey’s comments came in a speech at the Jackson Hole summit of central bankers in the US.
They contrasted with the more decisive language from Federal Reserve chair Jay Powell, who said that “the time has come” for interest rate cuts in the US.
The BoE cut interest rates this month for the first time in four years to 5% from 5.25%.
The Eurozone also cut rates earlier this year, while the Fed is still to begin to reduce rates from its 5.25% to 5.50% range.
Traders are betting that the US will cut interest rates more quickly than the UK, making this side of the Atlantic a better place to retain cash over the short term.
In the UK, inflation ticked up to 2.2% in July, according to official statistics published last week, from the 2% target it hit in May and June. Inflation hit 11.1% in October 2022.
The BoE forecasts it will reach 2.75% by the end of the year and remain above target all next year, due to fluctuating energy prices and other costs.
NatWest Markets head of economics and markets strategy Imogen Bachra says: “He [Bailey] adopted the same fairly cautious tone that we heard in the press conference a few weeks ago.
“The conclusion is that data is softening enough that the Monetary Policy Committee appears comfortable to take its foot off the gas, but not especially quickly and probably not as far or as fast as the market is pricing.”
Economists expect one more 0.25% rate cut from the BoE this year and for rates to fall to 3.75% by the third quarter of 2025, according to a Reuters poll.
