While homeowners watch mortgage rates, the City of London is watching the Pound Sterling. The Bank of England’s decision to cut rates to 3.75% carries a risk for the currency. High interest rates generally strengthen a currency by attracting foreign investors. Cutting rates, especially if other countries don’t, can make the Pound less attractive.
The IMF’s forecast that the UK will have the “highest inflation in the G7” complicates this. Usually, high inflation hurts a currency. If the Bank cuts rates while inflation is still high, traders might lose confidence in the Bank’s commitment to stability, leading to a sell-off of the Pound.
A weaker Pound is a double-edged sword. It helps exporters by making British goods cheaper abroad. But it hurts consumers by making imports (like fuel and food) more expensive, which drives inflation back up. This is the “inflation feedback loop” that the hawks fear.
The “gradual path” language from Governor Bailey is designed to soothe these currency fears. He is assuring the markets that he won’t slash rates recklessly. The 5-4 vote actually helps here—it shows the Bank is not “going soft” on inflation, but is deeply conflicted.
If the Pound holds its value in 2026, the strategy worked. If it crashes, import prices will soar, and the Bank will be forced to raise rates again to defend the currency, undoing all the relief families just received.