The pound sank by 0.7 per cent against the dollar after Andrew Bailey said that there was still a “further journey down” in interest rates provided that inflation cools.

In an interview with West Midlands Life as part of a visit to the region on Wednesday, the governor of the Bank of England said any further cuts to interest rates would “depend on the path of inflation going down”.

Bailey’s comments put downward pressure on sterling, which tends to weaken when the likelihood of lower borrowing costs increases. The pound dropped to $1.34, but so far this year is up by more than 7 per cent against the dollar.

Bailey, who was part of the seven-strong majority of rate-setters at the Bank’s meeting this month who voted to keep interest rates unchanged at 4 per cent, signalled that the UK economy had weakened because of sluggish consumer spending.

“People are being quite cautious at the moment. Of course, that affects spending, so that has an effect on the state of the economy because there isn’t as much,” Bailey, 66, said.

“People aren’t going out as much; they’re not shopping as much; they’re not going out to restaurants and so on as much; that affects the overall state [of the] economy.”

According to the Office for National Statistics, retail sales last month were 2.1 per cent below their pre-pandemic level in February 2020. Gross domestic product flatlined in July but did grow at the fastest pace in the G7 group of the world’s advanced economies in the first three months of the year.

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Traders believe that the Bank of England will leave the base rate on hold for the remainder of the year to counteract a resurgence in inflation, which was stuck at a 19-month high of 3.8 per cent in July and August. The central bank thinks that inflation will peak at 4 per cent in September.

UK government borrowing costs were broadly flat on Wednesday, with the yield on the 30-year bond stable at 5.5 per cent. Against the euro, the pound appreciated by 0.06 per cent to buy €1.14, but is down by 5 per cent since the start of the year.