The Bank of England could be a “bit more aggressive” on cutting interest rates, according to its governor.

Andrew Bailey said the speed at which borrowing costs are reduced will depend on the rate of inflation.

The Bank cut interest rates from 5.25% to 5% in August, which was the first drop in more than four years.

In an interview with the Guardian, Mr Bailey also said that the Bank was watching developments in the Middle East “extremely closely”, in particular any movement in oil prices which could fuel inflation.

The Bank of England has two more more meetings left this year to decide on interest rates, in November and December.

At the Bank’s last gathering in September, Mr Bailey was optimistic that borrowing costs would continue to fall. But he said at the time it was “vital” inflation remained low.

Following Mr Bailey’s remarks on Tuesday about the possible pace of interest rate cuts, the pound fell by nearly 1% against the dollar to $1.317.

The cost of crude jumped sharply to more than $130 a barrel following Russia’s invasion of Ukraine in February 2022, which propelled inflation to the highest level for four decades.

It has since subsided. But an escalation in the conflict between Israel and the Iran-backed armed group Hezbollah in Lebanon sent the oil price above $76 a barrel this week over fears that supplies could be disrupted.

“Geopolitical concerns are very serious. It is tragic what’s going on,” Mr Bailey told the newspaper.

“There are obviously stresses and the real issue then is how they might interact with some still quite stretched markets in places.”

But he added: “My sense from all the conversations I have with counterparts in the region is that there is, for the moment, a strong commitment to keep the market stable.”

As Labour prepares to unveil its Budget in less than four weeks’ time, Mr Bailey said that the government was correct to focus on capital investment.

“There is a clear need for it in terms of infrastructure,” he said, adding that the UK was facing at least three structural issues – an ageing population, demand for an increase in defence spending, and “dealing with climate change”.