UK Inflation has yet again surprised markets this morning, rising to 3.6% as economic troubles continue. This unexpected rise in inflation has now given The Bank of England a headache they really didn’t need, as usually rising inflation would point towards interest rates staying higher for longer in order to bring prices down. However, with the economy experiencing a lack of growth, they now face the difficult position of being damned if they cut rates and damned if they keep rates higher.
A rise in food prices was one of the main contributing factors to inflation climbing, as it is now evident that UK businesses are passing on the National Insurance increases that were implemented in April. Financial markets have also had a mixed reaction; usually higher inflation leads to a stronger Pound as it would lead to higher interest rates that attract external investment. But with the economy and jobs market faltering, it almost points to a need for lower interest rates and therefore has led to The Pound losing ground against both The Euro and Dollar.
The Bank of England’s policy meeting next month now becomes a lot more difficult and a decision on whether to cut or not will now be a flip of a coin. Thursday’s release of Employment figures and Wage numbers will now weigh heavily on the markets, with forecasts suggesting wages have dropped which again does not bode well.
Moving forward the only potential support for The Pound in the short to medium term will be the fact that if our interest rates do stay higher for longer, and higher than The U.S then more outside investment may prove pivotal.
GBP/EUR 1.1514 GBP/USD 1.3385 GBP/AED 4.9178
GBP/AUD 2.0528 GBP/CHF 1.0723 GBP/CAD 1.8368
GBP/NZD 2.2529 EUR/USD 1.1613 GBP/ZAR 23.9944