Back in June of last year, the pound was at $1.50 against the dollar as the first votes of the Brexit referendum trickled out. However, as the night veered on it became more apparent that Britain would go rogue and vote to leave the European Union, and the pound sharply dropped.
While the results were a surprise, sterling’s reaction was predictable, slumping to 31-year lows as the result was verified.
The pound will not only react to the uncertain Brexit negotiations but will be tightly bound to the US economic backdrop as well as the fortunes of eurozone data.
Parliamentary drama will be quite influential; an unstable government or even another general election could derail sterling.
Rising inflation, prompted by the weaker pound, has caused concern for the Bank of England. The central bank has raised the cost of borrowing this month, for the first time in more than a decade.
The rate hike removed the emergency stimulus put in place in the wake of the EU referendum. The interest rate increase will help the economy fight against inflation, which is now a full percentage point above the 2% target mark.
However, raising the cost of borrowing could extinguish the much-needed growth in the UK. Perhaps in such uncertain times, the BOE should hold off on a rate hike in favour of continued expansion of growth.
Aftercall, the inflation is not stemming from robust demand but instead deriving from the perils of Brexit, such as weak productivity.
Therefore, the BOE have little room to adjust monetary policy and instead provide support to the job market with low interest rates.
The bank left its forecasts for growth and inflation largely unchanged, predicting inflation would
touch 2.2% in three years – above its target. Policymakers stated that there would be ‘’considerable risks’’ naming Brexit as the source of their gloomy outlook.
The BOE has forecasted relatively steady growth over the next three years, averaging at about 1.7%.
Raising the cost of borrowing creates a speed bump in the road for businesses, mortgage holders, labor supply and foreign investment, and other facets of the UK economy which have already been stung by the tail-winds of the Brexit vote.
Today, we saw the Public-Sector Net Borrowing amount increase to £7.5 bn, from £6.6 billion in the previous month.