Sterling falls near two-week low after Bailey message

© Reuters. Pound banknotes are seen in this illustration taken March 1, 2022. REUTERS/Dado Ruvic/Illustration

LONDON (Reuters) – The British pound dropped to its lowest level in almost two weeks on Tuesday, a day after Bank of England governor Andrew Bailey reiterated the central bank’s cautious message from the mid-March policy decision.

Bailey said on Monday that the BoE had started to see evidence of an economic slowdown, which it expects to weigh down on domestically generated inflation.

The central bank raised its interest rate for the third consecutive meeting earlier in March, but softened its language on the need for further rate hikes.

Money markets are currently pricing in a further 133 basis points of tightening from the BoE by the end of the year but Commerzbank (DE:CBKG) FX and EM analyst You-Na Park-Heger thinks the key rate at around 2% by year-end seems exaggerated.

“The market expectations are likely to be further fuelled with each set of high inflation data, but once signs that the British economy is weakening further increase the market might have to adjust its expectations to the downside,” Park-Heger said.

“Medium-term we therefore see downside risks for Sterling.”

Sterling dropped 0.3% against the U.S. dollar to its lowest level since March 16 at $1.3055.

Against the euro, the pound was also down 0.3% to its lowest level since March 20 at 84.22 pence.

Meanwhile, data from the Bank of England showed lending to consumers rose in net terms last month by the largest amount in nearly five years.