Pound Down as Bailey Warns of ‘Slack’ in UK Economy

The British pound has fallen to its lowest point in three weeks following Bank of England Governor Andrew Bailey’s assertion that “slack” is developing within the UK economy. Bailey’s remarks, which included a clear signal that the central bank could cut interest rates more swiftly if the job market rapidly deteriorates, immediately impacted currency traders, leading to a noticeable depreciation of sterling against the dollar.
This emerging economic “slack” is, according to Bailey, partly a consequence of the increased tax burden placed on employers. He indicated that these higher costs are influencing businesses’ decisions on employment levels and wage increases, contributing to a broader slowdown in economic activity. Despite the complexities of managing inflation, which remains above the 2% target, Bailey reiterated his conviction that interest rates are on a downward path.
The governor’s comments come amidst a series of disappointing economic indicators. Recent GDP data showed unexpected contractions for two consecutive months in April and May, raising red flags about the UK’s overall economic health. Further deepening these concerns, a report from KPMG highlighted the sharpest decline in business hiring in almost two years, painting a picture of a struggling labor market.
Investors have reacted by increasing their expectations for an August rate cut, with money markets now reflecting an 85% chance, up from 76% previously. This increased probability underscores the market’s belief that the Bank of England is preparing for more decisive action to stimulate growth. The broader political context also plays a role, with the government facing considerable pressure to address the cost of living and stagnant economic performance.