Bank of England (BoE) Deputy Governor Sarah Breeden is testifying on the May Monetary Policy Report (MPR) before the UK Parliament's Treasury Select Committee (TSC) on Tuesday. 

Breeden presented the Annual Report before the MPR hearings.

Key quotes

Economy moving gradually into excess supply.

Future policy decisions require certainty that inflation is on track.

Tariffs expected to have small impact on the UK economy.

Slack opening up in labor market will guide policy.

I thought there was a case to cut bank rate in May even without tariff hit.

No reason to doubt steer from agents' pay survey that wage settlements will fall to 3.7-3.8% by end of year.

Spare capacity is opening up, labor market loosening.

Majority on MPC represent a broad church.

Our communication is as important as the vote split for understanding BoE policy stance.

Agree there is uncertainty about how far and how fast to cut rates.

Chance of inflation dynamics getting out of control are much less than in 2022.

Rise in bond yields is not a UK-only story.

Market reaction

When writing, GBP/USD is losing 0.19% on the day, trading near 1.3520.

BoE FAQs

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

Source: Fxstreet