Rate hikes imminent in UK
Inflation surges, Pound breaches $2
The British pound has moved through the $2 mark for the first time in nearly 15 years after the latest data showed an unexpected surge in inflation, prompting speculation that interest rates would have to be increased to slow inflation. The last time the $2-level was breached was just before sterling dropped out of the Exchange Rate Mechanism in September 1992. Significantly, Euro is also trading at a two-year high against the dollar and a record high versus the Japanese yen.
According to the data released by the government's Office for National Statistics on Tuesday, consumer price inflation increased to 3.1 percent in March, up from 2.8 percent in February - well above the Bank of England's target of 2 percent. The headline rate of retail price inflation, a wider inflation measure, rose to 4.8 percent from 4.6 percent. The rising inflation rate forced the Bank of England governor to write a letter to the government explaining why inflation has climbed and what the central bank proposes to do about it. The letter said that the central bank is “determined” to set interest rates at a level required to bring inflation back to its 2% target.
The central bank has raised its benchmark rate three times by a quarter percentage point each since August last year in an attempt to contain inflationary pressures. At its last rate-setting meeting earlier this month it kept rates at 5.25%. Now in the wake of the continued surge in inflation, it is expected to lift rates in May to 5.5% and possibly beyond.
The British pound has moved through the $2 mark for the first time in nearly 15 years after the latest data showed an unexpected surge in inflation, prompting speculation that interest rates would have to be increased to slow inflation. The last time the $2-level was breached was just before sterling dropped out of the Exchange Rate Mechanism in September 1992. Significantly, Euro is also trading at a two-year high against the dollar and a record high versus the Japanese yen.
According to the data released by the government's Office for National Statistics on Tuesday, consumer price inflation increased to 3.1 percent in March, up from 2.8 percent in February - well above the Bank of England's target of 2 percent. The headline rate of retail price inflation, a wider inflation measure, rose to 4.8 percent from 4.6 percent. The rising inflation rate forced the Bank of England governor to write a letter to the government explaining why inflation has climbed and what the central bank proposes to do about it. The letter said that the central bank is “determined” to set interest rates at a level required to bring inflation back to its 2% target.
The central bank has raised its benchmark rate three times by a quarter percentage point each since August last year in an attempt to contain inflationary pressures. At its last rate-setting meeting earlier this month it kept rates at 5.25%. Now in the wake of the continued surge in inflation, it is expected to lift rates in May to 5.5% and possibly beyond.
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2 comments:
signs of a rate hike are there. But it is important to take into consideration the reduction in inflation that happens due to appreciation of currency. Because of the lower cost of imports.
Also a rate hike could make the pound appreciate even more hurting the exporters of the country.
So, there is also a chance that the Bank of England could take a wait and watch policy.
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Thanks Shikhil, for sharing your viewpoint.
It’s quite normal for central banks to watch the impact of their earlier actions before taking the next move, especially if it is about interest rate changes and their impact on growth and inflation. But given the political sensitivity associated with inflation and the pace of rise in inflation in recent past, I feel the BoE can ill-afford to wait and watch at this juncture. Maintaining inflation level steady and managing inflationary expectations is very important for countries that have explicit inflation target.
Regarding the currency movements, I believe it’s largely triggered by the expectations of higher interest rates in UK as also a sustained dollar weakness in the wake of a continuing slowdown in the US economy giving rise to expectations of rate cuts.
Thanks again for your comments.
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