Weak pound could add to UK inflation, say economists
The judgment of the markets was swift and brutal. Currency traders took one look at what the Bank of England was predicting for the UK economy and launched a sustained attack on the pound.
It was noon last Thursday when Threadneedle Street announced it was expecting that a 40-year high of more than 10% for the annual inflation rate would coincide with a shrinking economy.
Bank governor Andrew Bailey told a press conference he wasn’t keen on the term stagflation – considering it imprecise. But the parallels with the 1970s were precise enough to trigger sharp losses for sterling. By the end of the day in London, the pound had lost two and a half cents against the US dollar.
By UK standards, what has happened in the past few weeks qualifies as a wobble rather than a full-blown crisis of the sort that forced sterling off the Gold Standard in 1931 or out of the European Exchange Rate Mechanism by speculators led by George Soros on Black Wednesday 30 years ago this year.
Nor was the sell-off as serious as that seen in 1976, the crisis that persuaded the then Labour government to ask for financial support from the International Monetary Fund. For the pound’s current weakness to become as legendary as 1931, 1976, 1992 or the postwar devaluations of 1949 and 1967, it would have to fall from today’s level of about $1.23 against the US dollar to parity, where £1 buys $1.
Even so, sterling’s weakness has implications. Stephen King, senior economic adviser at HSBC, thinks there is a risk of a feedback loop whereby the fall in the value of sterling adds to inflationary pressure by making imports dearer, and the evidence of higher inflation then leads to a renewed drop in the value of the pound.
Sterling, King says, is in the sights of the
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