British Pound holds gains against Japanese Yen following BoE Bailey’s remarks
- BoE Governor Bailey noted resilient UK growth and subdued second-round inflation effects despite above-target inflation frustration.
- GBP gained support as UK GDP unexpectedly grew 0.1% in August, beating forecasts of a contraction.
- Hawkish comments from BoJ board member Junko Koeda signaled potential rate hikes.
GBP/JPY extends its gains for the second successive day, trading around 209.80 during Asian hours on Friday. The currency cross remains stronger as the British Pound (GBP) maintained its position after Bank of England (BoE) Governor Andrew Bailey expressed ongoing frustration with above-target UK inflation during a moderated discussion at the Institute of International Finance Annual Membership Meeting in Bangkok, Thailand.
Addressing the economic landscape, Bailey noted that while the UK economy has proven more resilient than initially expected, its growth remains insufficient for the nation's needs. He added that it is still too early to form definitive views on the strength of second-round inflation effects; however, early signs appear subdued as businesses increasingly prioritize cost-cutting over raising prices.
The British Pound received a boost following stronger-than-expected UK economic data released on Thursday. According to official reports, the UK economy unexpectedly expanded in August, with Gross Domestic Product (GDP) growing by 0.1% month-over-month following a 0.4% increase in July. This expansion outperformed market forecasts, which had anticipated a 0.1% contraction.
UK data strength bolsters November BoE hike expectations
Societe Generale’s Kenneth Broux highlights that “above forecast UK GDP adds to case for November BoE hike,” with the stronger growth print reinforcing the constructive backdrop for the Pound. He notes that dip buyers have been quick to support GBP/USD on softer US yields, keeping spot anchored around the 1.32 pivot as markets lean further into the prospect of BoE tightening later this year.
However, further gains in the GBP/JPY cross may be limited as the Japanese Yen benefits from hawkish signals from the Bank of Japan (BoJ). BoJ board member Junko Koeda stated on Thursday that the central bank should avoid excessive caution regarding interest rate increases, hinting at a potential near-term hike in borrowing costs. She emphasized that the BoJ should adjust its policy rate in a timely manner while taking into account the estimated neutral interest rate range.
Koeda’s speech score of 8.2/10 matches the speaker’s historic average on FXS Speechtracker, signaling a consistent tone but with a clear hawkish tilt versus the recent BoJ baseline. Emphasis on an accommodative monetary environment, upside price risks, and a neutral rate “significantly above 1%” points to scope for further normalization, even without a preset pace of rate hikes.
The commitment to adjust policy so underlying inflation does not exceed 2% and the note that the September rate hike reflected resilient economic data reinforce a cautious but tightening bias. For FX, the combination of a higher perceived neutral rate and a comprehensive assessment of financial conditions is supportive for the Yen, as markets can price in additional gradual rate increases if inflation stays near 2% and growth remains resilient.
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.