BoE's Pill: Stalling growth next year would leave Bank rate unchanged or even lead to a cut

Greater uncertainty is likely to surround the interest rate outlook from spring, Bank of England (BoE) Chief Economist Huw Pill said on Friday, according to Reuters. He stressed that "nothing is baked in" for interest rates next year.

What are Pill’s key messages?

"There is no preset upward path for interest rates from spring and beyond."

"Possible that bank rate would stay on hold or even fall if we saw stalling of growth next year."

"Key determinant will be margin squeeze on companies and how companies react."

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

How did GBP/USD respond?

Following the remarks, bearish pressure persisted on GBP/USD. The pair was last trading at 1.3390, down 0.45% on the day.

BoE: frequently asked questions

What is the Bank of England’s role, and how does it affect the Pound?

Responsibility for the United Kingdom’s monetary policy rests with the Bank of England (BoE). The central bank’s main objective is ‘price stability’, meaning a steady inflation rate of 2%, which it pursues by adjusting base lending rates. By setting the rate at which it lends to commercial banks and at which banks lend to one another, the BoE determines interest rates across the wider economy. The value of the Pound Sterling (GBP) is also affected by these decisions.

How does Sterling respond to the Bank of England’s monetary policy?

Inflation above the Bank of England’s target prompts the central bank to raise interest rates, increasing borrowing costs for individuals and businesses. Higher rates support the Pound Sterling by making the UK a more attractive destination for global investors’ money. By contrast, below-target inflation signals slower economic growth. In such circumstances, the BoE will consider cutting rates to make credit cheaper, hoping that businesses will borrow to fund projects that generate growth. This is negative for the Pound Sterling.

How does Quantitative Easing (QE) work, and what does it mean for the Pound?

When interest rate cuts cannot deliver the required outcome, the Bank of England may turn to Quantitative Easing (QE) as a last resort in extreme circumstances. This policy substantially expands the flow of credit through a stalled financial system. To carry it out, the BoE prints money and purchases assets from banks and other financial institutions, usually government bonds or AAA-rated corporate bonds. A weaker Pound Sterling is the usual result of QE.

How does Quantitative tightening (QT) work, and what is its effect on the Pound Sterling?

As the economy strengthens and inflation begins to rise, Quantitative tightening (QT) reverses the process of QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. Under QT, however, it ceases further bond purchases and no longer reinvests the principal repaid when bonds already in its portfolio mature. QT generally supports the Pound Sterling.