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Pound on track for biggest six-month drop since 2016

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·Business Reporter, Yahoo Finance UK
·3-min read
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Bank of England, in the City of London. The pound is down 10% year to date
The pound fell after Andrew Bailey did not rule out raising rates by 50 basis points at the next monetary policy committee meeting, saying that the decision is still a month away.

The pound (GBPUSD=X) is heading for its biggest six-month drop against the dollar since 2016 as the Bank of England (BoE) continues to combat runaway inflation.

It comes after central bank governor Andrew Bailey vowed on Wednesday to act "more forcefully" if sky-high inflation persists. This was despite the risk of Britain being plunged into recession.

Bailey did not rule out raising rates by 50 basis points at the next monetary policy committee meeting, saying that the decision is still a month away.

“There will be circumstances in which we will have to do more,” he said at the European Central Bank’s (ECB) conference in Sintra, Portugal.

“We’re not there yet in terms of the next meeting. But that’s on the table. But you shouldn’t assume it’s the only thing on the table,” he added.

Elsewhere on Wednesday, an incoming Bank of England policy maker also said there could be room for more gradual action on raising interest rates to fight inflation.

Swati Dhingra spoke to the Treasury Select Committee in a pre-appointment meeting that assessed her suitability for a member of the MPC.

"In hindsight, I think that maybe there is some room for a very gradual approach here. Newer data is starting to show that possibly a slowdown has become much more imminent than we thought before,” she said.

She will become a Bank of England policy-maker in August, replacing the hawkish Michael Saunders.

Read more: What if Bank of England fails to control inflation?

On the back of the comments, sterling dipped to $1.2127 by mid-afternoon on Wednesday, its lowest level since 16 June, when Threadneedle Street raised interest rates by 25 basis points to 1.25%.

However, it has since recovered slightly against the dollar, breaking a three-day streak of losses as investors turned their attention back to surging inflation.

The pound rose against the dollar on Thursday morning and is trading at $1.2133 at the time of writing. It is also 0.5% higher against the euro (GBPEUR=X) at €1.1638.

But the pound has fallen more than 10% against the dollar this year so far, with its performance hampered by a strong US currency, fears of a UK recession, and growing uncertainty about the consequences of Brexit.

Read more: UK household incomes fall for fourth consecutive quarter

Meanwhile, new data from the Office for National Statistics (ONS) showed UK incomes are on their longest downwards slide on record, while the current account deficit widened to a record £51.7bn.

Lee Hardman at MUFG said: “The BoE is facing one of the toughest policy trade-offs in the near term as it tries to balance increasingly elevated inflation against slower growth which remains a negative fundamental backdrop for the pound.”

City Index analyst Fawad Razaqzada told Reuters: "The pound continues to be sold as worries about a sharp economic slowdown outweigh risks of runaway inflation.

"This has given rise to expectations that the BoE will front load rate hikes, before stopping and potentially reversing the rate increases."

He added that Dhingra had "gone one step further by saying that the central bank will need to tighten its belt very gradually going forward".

Watch: How does inflation affect interest rates?

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