Bank of England Governor Andrew Bailey told the Treasury Select Committee that inflation is moving back toward the 2% target. If that continues, it could allow more rate cuts this year. He said a cut at the next meeting is “a genuinely open question”, and he will decide based on the data, without making promises in advance.
Bailey said headline inflation was broadly in line with expectations. Goods inflation was weaker than expected, but services inflation did not cool as much as the Bank had hoped. That suggests domestic price pressures are still sticking around.
Policy Caution And Inflation Progress
Chief Economist Huw Pill said the Bank may previously have put too much weight on inflation hitting target at one moment in time. He said inflation pressure has not been fully removed yet, so policy should stay cautious.
The hearing implied that rate cuts are possible. But the timing and speed will depend on services inflation and broader domestic conditions. GBP/USD climbed to a daily high above 1.3500 as the Pound strengthened and the US Dollar gave back earlier gains.
The BoE targets price stability, aiming for 2% inflation, mainly by setting the base interest rate. It can also use quantitative easing (QE), which usually weakens Sterling, or quantitative tightening (QT), which is generally supportive for Sterling.
Right now, the Bank of England is sending mixed messages, which adds uncertainty in the weeks ahead. Governor Bailey sounds open to cutting rates soon. Chief Economist Pill is pushing for caution, pointing out that stubborn inflation is still a risk. With these different views, it is hard to predict exactly when the first cut will happen.
Market Volatility And Trading Implications
This split was clear in the latest January 2026 data. Headline inflation fell to 2.1%, close to the Bank’s 2% target. But services inflation stayed high at 5.5%, which is a key concern. That makes the next inflation report a major event that could trigger a big market move.
With this uncertainty, the Pound is likely to stay volatile. Implied volatility on one-month GBP options has already risen to 8.5%, up from around 7.0% at the start of the year. Traders may look to buy volatility, preparing for a sharp move in either direction after the next inflation release.
The Pound’s recent rally above 1.3500 against the dollar may be too strong, given the Bank has clearly signaled that rate cuts are being considered for 2026. This strength could create a chance to position for a weaker Sterling. One way to do that is to buy GBP/USD put options with an April expiry, in case the Bank shifts to a more dovish tone at the next meeting.
In 2025, the debate was about *whether* the Bank could cut rates at all. Now the debate is about *when* cuts will begin, which reflects a clear change in policy direction. Even with some hawkish voices, the overall path for interest rates now points lower.
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