UK inflation has come in at a strong 3% per annum, which is weighing on the pound, because an interest rate hike in 2018 looks likely. The pound is trading sideways at 1.30-1.32 USD. Why is the Bank of England so cautious about raising rates?
Because central banks, BoE included, are letting inflation run to kill the massive debt accumulated over past decades. They cannot raise interest rates quickly, as this would burst the bond bubble and disrupt the economy. BoE is playing safe and will raise rates gradually and slowly – so inflation will run higher. This will push down the pound.
Brexit has not destroyed the UK economy, but is has boosted inflation. Currency wars are not over, just because markets expect interest rates to rise. Global economies are still way into a devaluation battle, so central banks must play dovish. Too much short-term confidence may bring investors back too early, and demand for currencies would weigh on growth.
By Arnaud Masset