The pound is no stranger to economic pressure. The currency of the United Kingdom has been affected by market turbulence for a number of months now. The European debt crisis has played a significant role in pushing the Bank of England towards interest rate cuts and tougher injections into the economy. Consumer price inflation is also picking up, and experts are predicting that the economy will grow by a mere one percent this year. That is not fast by historical standards and experts expect that growth will be held back at least between one and two percent.
If these predictions are accurate, then the Bank of England will need to maintain its current very low interest rate regime, which is contributing to pressure on the British Pound. If rates begin to rise, then the pound will certainly suffer. In fact, analysts have expressed doubts about how long the current low will last. If rates begin to rise, they predict that consumer price inflation will outstrip the Bank of England’s inflation target. This would result in an extremely difficult time for the British economy.
For many years, consumers have enjoyed rising consumer price inflation. However, recent increases have been far too sharp to be comfortable. During the past couple of years, the Bank of England has tried to control sharp increases in wage costs. Unfortunately, this has not always worked out well. As a result, inflation has continued to surge and the Bank of England has repeatedly tightened its mortgage interest rate base.
Traders are now saying that the Bank of England may be forced to look again at its zero interest policy. If the BoE starts raising interest rates, it will surely result in great pressure on the British Pound. Historically, the Bank of England has rarely raised rates above 2 percent. This means that the Bank of England is being very cautious with its moves. Traders say that this is not unusual, but rather signals the growing risk that the BoE faces. If the Consumer Price Index rises sharply, then the Bank of England will find itself under tremendous financial pressure as inflation pressures begin to push the economy into recession.
Traders believe that the BoE will hold off for a few months, in order to let consumer price inflation to rise to a level that will be tolerable for the British economy. If the consumer price inflation continues to surge, then the Bank of England will need to look again at its interest rate decisions. The BoE has already started to increase rates slightly to combat rising inflation. Even though the BoE is technically still in recession, it is believed to be waiting for market indicators to indicate that the economy may be on the verge of recovery. However, if market analysts are correct and the Consumer Price Index continues to rise rapidly, then the BoE will most certainly have to react.
With unemployment at an all-time high and inflation on the rise, it’s not hard to see why so many investors are dumping money into the UK financial markets. With the unemployment rate expected to rise above the official unemployment rate soon, the market has become very unprofitable for all but the largest financial institutions. In fact, the situation is so bad for the UK economy that officials are reportedly worried that the UK may suffer a financial crisis similar to the banking crisis in America. Traders believe that the British pound is being held down by overpriced assets in the global stock market. These include government bonds, bank stocks and mortgage backed securities. While it is too early to say that the problems with the financial markets will spill over into the British economy, it is clearly a looming danger that investors need to address.
Many analysts believe that the problems with the British pound will continue until the European Central Bank begins to increase interest rates. Although experts agree that the Bank of England will probably wait until the end of the year to increase rates, they believe that they will soon do so. If this happens, the British pound could begin to weaken against the dollar as well. The European Central Bank already controls the amount of interest that can be charged on loans in its own currency, so a sudden interest rate hike from the UK would cause significant adverse effects to the British economy. This would most likely lead to more panic purchases in the pound and pressure on the Bank of England to raise interest rates.
Whether or not the Bank of England will increase interest rates is anybody’s guess. The recent record low interest rates in Europe have led many to believe that the situation in the UK is hopeless. However, many economists believe that the problems in Europe over the last few years are temporary. They believe that the UK economy will be able to weather the storm during the time until interest rates start to rise again.