Markets are betting the Bank of England will be forced to act in a ‘reverse currency war’ Business

The fall of the pound in recent weeks had been partly due to the interest rate differential between the Bank of England and those of other countries, but it is difficult to support it durably with higher rates .

“This puts the central bank in a perilous position: if it does too little, imported cost pressures continue to build, if it does too much, it will only deepen the recession,” Koopman said. .

Evercore ISI’s Krishna Guha predicted a possible “reverse currency war” in which central banks would try to prop up their currencies to contain inflation, rather than the traditional move to weaken the exchange rate to try to boost competitiveness exports from their economy.

“The fact that the pound initially weakened on the decision to go just 0.25 percentage points today – and only reversed as traders then focused on the index of one or more 0s, 5s ahead – will add at the margin further pressure on the MPC to keep pace with its peers and the strong US dollar in which commodity prices are set,” he said.

A currency appreciation should help control inflation by lowering import costs.

This is particularly important for commodities such as oil which are traded in dollars, meaning a weaker pound makes importing fuels more expensive. A stronger pound may mitigate some of the cost increases.

If the pound were to fall again, economist Ellie Henderson of Investec said “we could see further upward revisions to the inflation profile the next time the projections are released in August”, threatening to take the peak of inflation even beyond the 11% currently forecast.

Prior to the Bank’s announcement, economists had predicted that one or two policymakers would vote to hold interest rates. But in this instance, none did, indicating a growing acceptance that rates will have to rise further over time.

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This notice was published: 2022-06-16 17:27:53

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