Pound falls as BoE chief hints at further rate cuts amid cautious consumer spending

London — The pound slipped against the dollar after Bank of England Governor Andrew Bailey signaled a potential further path of rate reductions, saying cautious households were pulling back on spending as inflation cools. Sterling fell as much as a cent to just above $1.34, a three-week low, underscoring the tension between a cooling consumer price backdrop and a fragile economy.

Bailey, speaking to West Midlands Life, said there was a ‘‘further journey down’’ for interest rates as long as inflation continues to ease. While cutting rates could help lift activity, he warned that policymakers must balance that with the need to bring inflation back to the 2% target. Markets have priced in rates remaining at about 4% through next year, even as the BoE weighs when to begin trimming policy further.

"People are being quite cautious. That affects spending so that has an effect on the state of the economy," Bailey said. "People aren’t going out as much, they’re not shopping as much, they’re not going out to restaurants as much and so on." The comments come as inflation remained stubbornly high and the economy showed signs of weakness, including a softening jobs market. The Bank’s current challenge is to reduce inflation without choking off activity in a still-fragile economy.

The Bank faces inflation running around 3.8%, well above the BoE’s target, and signs of a slowing economic pulse. Bailey’s remarks reinforced the view that policy will remain data-dependent, with the door open to cuts if inflation continues to cool while demand holds up enough to prevent a steep drop in growth. He reiterated the central aim of delivering price stability while avoiding a sharp expansion or contraction in economic activity.

The remarks also touched on the forces behind higher food prices, which have contributed to headline inflation. Bailey indicated that labor costs have risen in the food industry due to government actions such as the employer national insurance contribution and the living wage. He suggested these factors have fed into the prices households pay, complicating the inflation battle for the BoE and the government alike.

The currency reaction reflected the evolving outlook. With the pound trading near its three-week low against the dollar, traders weighed the prospect of easier policy against the risk of renewed inflation pressures should food and energy costs rebound. Bailey’s comments follow a run of mixed data that has kept the BoE in a precarious position: inflation cooling but not quickly enough to justify a rapid easing path, and a jobs market that has not yet shown a robust rebound.

Analysts noted that Bailey’s framing of a gradual, data-driven easing path is consistent with his broader messaging: the BoE will act to support activity if inflation subsides, but it will not rush to ease policy if price growth reaccelerates or if the economy falters more than anticipated. The governing council has signaled readiness to respond to evolving data, with policy expectations priced in by financial markets at roughly a 4% Bank Rate through next year.

Specifically, Bailey underscored the delicate balance the BoE must strike between returning inflation to target and maintaining a sufficient level of economic momentum. The central bank has already left the policy rate at 4% for an extended period as it gauges the persistence of inflationary pressures and the resilience of consumer demand in the face of higher living costs.

As households continue to adjust their budgets in response to higher prices, economists say the risk for the BoE is that weaker consumption could drag on growth before inflation convincingly cools. Bailey’s comments suggest policymakers are prepared to deploy a gradual approach to easing, potentially beginning once inflation trends confirm a sustained downward path.

The discussion comes as investors monitor domestic data for signals on the timing of any future rate cuts. Policy decisions in Britain have taken on added significance given the global rate path, with central banks around the world also navigating the tension between inflation and growth. The BoE’s guidance, coupled with the currency trajectory, suggests a period of heightened volatility as markets price in a gradually easing cycle while remaining sensitive to any shift in inflation dynamics or labor-market momentum.

With inflation proving more stubborn in the near term than many expected, Bailey’s remarks reinforce the view that any policy easing will be calibrated and contingent on ongoing improvement in price pressures. The Bank’s ability to sustain activity while conquering inflation will be tested in the months ahead, as officials weigh existing policy constraints against incoming data on spending, wages, and the broader economy.

In the near term, investors will be watching for fresh inflation readings, wage data, and consumer spending figures to determine whether the BoE can meaningfully lower rates without reigniting price pressures. Bailey’s emphasis on a cautious approach signals policymakers intend to stay data-driven, ready to adjust the pace of any rate reductions as the inflation picture evolves and as households navigate an ongoing period of cost-of-living adjustments.