Falling Pound Might Lead to Higher Inflation

The inflation is an issue in the UK and it is expected to reach 2pc from the current 0.2 percent rate by 2016 end.

The UK currency, commonly known as Sterling or pound, is experiencing a slide in 2016. The value of the pound is slipping in 2016 and has now reached a point of about 5% fall when compared to the currencies of other big trading markets. The pound to dollar exchange rate is seeing a weakness in the markets and it is believed that this weakness will continue for some time.

The pound is hovering around €1.30 and it is just above $1.40. The pound is not at its weakest when compared to the Euro currency. It was below the €1.30 for about 7 years from 2008 till the end of last year. The main problem is its exchange value against the dollar. This rate is very low and sterling’s value against the US dollar has gone less than $1.42 just about three months in total over the last 30 years. This is a really worrying sign.

You can Visit this ArticleComparing of Dollar and Euro’ to know more about Euro.

The main reason as to why the pound is sliding in value against the dollar is the deviation in the interest rates between the two countries. The pound was trading at $1.55 during the summer and also in early autumn. There were expectations in the UK as well as the US markets that the interest rates would raise around the turn of the year.

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The Fed delivered its rate rise in December last year. The Bank of England also had announced in July that it was considering a rate increase by the end of the year. But, once the November inflation report was brought out by the Bank of England it became clear that the turn of the year that the Governor was talking about was not end of 2015, but the end of 2016. The Governor last week also confirmed that he is in no hurry to increase the UK interest rates and to follow what Fed has done.

The slipping of the sterling against the Euro is not due to the non-implementation of newer interest rates by the Bank of England, but due to the improvement in the economic situation in many of the other European countries.

There is no way one can accurately forecast the exchange rates. But, the sterling is expected to be at historic low levels against the dollar unless and until the Bank of England changes its mind and makes a change to its interest rates. It would be difficult for the sterling to climb much against the Euro currency as well.

The consumers will be at the receiving end of this downslide of sterling against the U.S. dollar and Euro currencies. The cost of imported foods, various products and energy would increase in the UK. The UK inflation will peak and this will put a serious cap on the consumer’s spending power. The inflation surge should not be that strong this year, but in all likelihood would end up at 2 percent than the present rate of 0.2 pc.


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