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U.K. Inflation Is at 5-Year Highs, but Why is the Pound Dropping?
October 20, 2017 8:43 amVideo
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British inflation is surging, and the Bank of England (BOE) is seriously considering raising interest rates sooner rather than later. So then why is the British pound failing to pick up speed? The answer lies in Mark Carney’s latest warning on Brexit.
The U.K.’s consumer price index (CPI) reached 3% in the 12 months through September, the Office for National Statistics reported this week. That was the highest level since April 2012. What’s more, it can still go higher, according to BOE Governor Carney. That was the risk the Bank took when it slashed interest rates in 2016 following the Brexit referendum.
The latest pickup in consumer prices all but guarantees a rate hike in the coming months, as policymakers seek to begin normalizing monetary policy. In fact, rates could rise as early as next month if all the stars align.
Although rates may rise very soon, a warning by Carney has prompted a mass exodus from Faced with the possibility of failed Brexit talks, the central bank chief warned of grave risks to the nation’s outlook.
In testimony to lawmakers in British parliament, Carney said the European Union (EU) risks destabilizing the region’s financial sector should it call off Brexit talks.
Last week, EU leaders said that Brexit progress has been insufficient for talks to move to the next phase. That’s because EU lawmakers are looking to settle the divorce before moving on to free trade talks. Thorny issues tied to mobility rights are still unresolved despite five rounds of negotiations.
The British pound has declined roughly 200 pips against the dollar this week. Markets were under pressure on Friday, as cable briefly fell below the 1.3100 handle.
Sterling is extremely sensitive to Brexit speculation. The vote to leave the EU in June 2016 triggered the pound’s biggest drop in over three decades.
[1] BBC News (17 October 2012). “UK inflation at highest since April 2012.”
[2] Graeme Wearden and Nick Fletcher (17 October 2017). “Bank of England’s Mark Carney says inflation hasn’t peaked yet after hitting 3% today – as it happened.” The Guardian.
[3] Jason Douglas (17 October 2017). “BOE’s Carney Issues Stark Warning on Brexit Risks.” The Wall Street Journal
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