BoE's Pill: If growth stalls next year, Bank rate could remain on hold or fall

For next year’s interest rates, "nothing is baked in". That was the message from Bank of England (BoE) Chief Economist Huw Pill on Friday, according to Reuters. He also expects greater uncertainty in the outlook from spring.

Main points

"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

1.3390: GBP/USD stays under pressure

At the latest reading, GBP/USD traded at 1.3390, down 0.45% on the day. The pair remains under selling pressure following Pill’s remarks.

BoE questions and answers

Bank of England: its role and impact on the Pound

A stable inflation rate of 2%, or ‘price stability’, is the primary objective of the Bank of England (BoE), which determines monetary policy for the United Kingdom. To pursue this goal, it adjusts base lending rates. By setting the rates at which it lends to commercial banks and banks lend to one another, the BoE determines interest-rate levels across the economy. These rates also influence the value of the Pound Sterling (GBP).

BoE monetary policy: the implications for Sterling

Above-target inflation prompts the Bank of England to increase interest rates, raising borrowing costs for households and businesses. Higher rates support the Pound Sterling by making the UK a more attractive destination for global investors’ funds. By contrast, inflation below target signals slowing economic growth. The BoE will then consider rate cuts to make credit cheaper, hoping businesses will borrow to fund projects that generate growth. This is negative for the Pound Sterling.

Quantitative Easing (QE): how it works and affects the Pound

When rate cuts cannot deliver the required outcome, the Bank of England can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. The policy substantially expands the flow of credit through a stalled financial system. Under QE, the BoE prints money to purchase assets from banks and other financial institutions, typically government bonds or AAA-rated corporate bonds. The Pound Sterling usually weakens as a result.

Quantitative tightening (QT): the process and impact on Sterling

As the economy strengthens and inflation begins to rise, Quantitative tightening (QT) reverses QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. QT instead halts further bond purchases and ends the reinvestment of principal from maturing bonds already held by the BoE. The policy generally supports the Pound Sterling.