The pound declined as Andrew Bailey’s remarks cast doubt on the need for further interest rate increases.

The governor of the Bank of England anticipates that inflation will “fall quite significantly” this year, bringing into question the need for a further interest rate increase at the policymakers’ meeting later this month.

Bailey informed members of parliament that declining energy prices and a weakening labour market indicated that the cycle of interest rate increases was nearing its conclusion.

Currency traders sold the pound, pushing it below £1.25 for the first time in three months.

The governor stated, “I believe we are much closer to the peak of the cycle now,” as he described how earnings were declining and the economy was slowing due to 14 consecutive increases in borrowing costs since December 2021.

The financial markets anticipate that the central bank’s monetary policy committee (MPC) will raise interest rates by 0.25 percentage points to 5.5% at its meeting on September 21.

Financial markets have effectively priced in a rise to the highest level since December 2007 by assigning a probability of 82.5% to a quarter-point increase, down from 85% earlier in the day.

Bailey told members of the Treasury committee that numerous economic indicators indicate that the decline in inflation will continue this year. The consumer price index (CPI) decreased to 6.8% in July from 7.9% in June.

He stated, “As I’ve stated, I believe [the decline in inflation] will be quite pronounced by the end of this year.”

“The question now is, as headline inflation decreases and people gain confidence, will inflation expectations continue to decline and be reflected in wage negotiations?”

According to him, consumer and business inflation expectations have moderated in recent months, and firms have reported offering lower wage increases, with average salary increases falling to 5% from above 6% just a few months ago.

The governor of the Bank of England cautioned MPs that there were “mixed signals” regarding the inflation trajectory.

Despite the decline in inflation, he stated that wage growth was robust, and the service sector was driving monthly price increases at an unexpectedly high rate.

In August, the nine-member MPC was divided in its resolution to raise interest rates.

Swati Dhingra, a member of the MPC, stated that she was less concerned about the likelihood of a decline in service prices, arguing that the nature of service industries necessitated a lengthy latency before interest rate increases took effect.

At the last meeting, Dhingra voted to maintain the status quo on interest rates, arguing that the cumulative effect of increases in the cost of borrowing had yet to completely affect economic growth.

Jeremy Hunt, the chancellor, echoed this sentiment in response to the recent increase in petrol pricing. The central bank anticipates that the CPI will revert to its 2% target by the end of the following year.

Because fuel prices decreased in August of last year and increased slightly in August of this year, the next report may show an increase, Bailey predicted.