Inflation above Bank’s target as pound falls
INFLATION will this week rise above the Bank of England’s 2 per cent target for the first time in more than three years as sterling’s collapse prompts a surge in prices.
The Consumer Price Index hit 2.1 per cent in February, up from 1.8 per cent in January, official figures are expected to show.
Economists at consultancy Capital Economics said in a note to clients: ‘The big picture is that CPI inflation’s upward path should see it reach about 3 per cent by the end of 2017.’
Fuel and food are likely to be key contributors. Capital added: ‘Fuel prices rose by a monthly 1.1 per cent in February after falling by 1 per cent in the same month a year ago. This suggests that the contribution of fuel prices to inflation rose by about 0.1 percentage point.’
Food prices, which had previously been falling, are increasing too. Rising inflation has been putting the brakes on economic growth and consumer spending is slowing.
Howard Archer, chief UK economist at IHS Global Insight, said: ‘Retail sales are expected to have been lacklustre in February after weakened performances in January and December. Consumers are now limiting their spending as rising inflation increasingly squeezes purchasing power.’
Britain is close to facing realterms pay cuts. Wage growth excluding bonuses has slowed to 2.3 per cent, compared with 2.6 per cent previously.
THE pound is set to plummet as Brexit negotiations begin, amid fears of a lengthy stand-off between the UK and the European Union, City bankers are warning this weekend.
Already down about 18 per cent since last June’s referendum, some analysts believe it will fall further in the coming months, stoking inflation and bringing more pain to those going abroad this summer.
Theresa May is poised to trigger Article 50, setting in motion a twoyear process leading to Britain’s exit from the EU.
But City experts fear no progress will be made on trade talks for months, amid tetchy rhetoric on both sides as the remaining EU members try to extract a £60 billion ‘exit bill’ from the UK.
The pressure on the pound will be compounded later this month as sterling is set to drop down the rankings of ‘reserve currencies’ used by central banks, with the Japanese yen set to emerge as a more popular currency.
Viraj Patel, a currency strategist at bank ING, said: ‘Initial Brexit negotiations could see both sides playing hardball and seeking to protect domestic interests. The pound would bear the brunt of the greater political uncertainty.’
Patel expects the pound to fall to as low as $1.15, against $1.23 today. A stand-off would also hit the euro, but by a smaller amount, meaning holidaymakers travelling to the eurozone over the summer will see the cost of their holidays rise, possibly getting €1.11 for every pound rather than €1.15 currently.
Patel warned there are other big risks for sterling. A Scottish referendum prompting the chance of the break-up of the UK would drag the pound as much as 8 per cent lower against the dollar, while sterling’s reserve currency status is also under threat.
Reserve currencies are those central banks set aside to hedge their risks. Central banks have been buyers of sterling in the past decade as the City has expanded.
‘The pound’s use as a reserve currency has tracked London’s grow- ing role in the world as a financial centre,’ Patel said.
Central banks need pounds in case they have to meet any bills denominated in sterling, which they might have to do if they transact through City banks.
New figures from the International Monetary Fund, due out at the end of this month, are likely to show that the yen has overtaken the pound in its use as a reserve currency.
Patel said the yen’s status had improved in part because of the growth of China, with central banks holding yen to meet any Asian currency bills.
Latest figures suggest central banks have 4.5 per cent of their currency holdings in sterling. If that falls below 3 per cent, ratings agency Standard & Poor’s has said it would cease to designate sterling as a reserve currency.
The pound has been heavily sold since the UK voted to leave the EU amid fears that Brexit will hammer the terms of trade for Britain, particularly the City. London is a magnet for international capital, boosting the value of the pound. But with the passporting rights that allow City banks to service European clients poised to go, there are fears that the City’s status will be hugely diminished.
Brexit supporters have suggested that the pound’s fall has been overdue and is great news for exporters. However, it is also driving up inflation, putting the squeeze on UK consumers. Economists argue that devaluations simply boost exporters at the expense of consumers and that they do not necessarily deliver any gain in overall productivity – the mark of underlying growth in the economy.
The pound fluctuated widely last week, buffeted by suggestions that US interest rates may rise more slowly than predicted, that UK rates could rise sooner than predicted, and also by the failure of far-right eurosceptic politician Geert Wilders to gain as many seats in the Dutch elections as some had predicted.
Other key elections on the Continent this year are likely to prompt further moves in sterling, with the French presidential elections in April and May likely to provide further indications over the possibility of a eurozone break-up.
When Brexit negotiations begin, access to the EU for financial services firms is likely to be near the top of the agenda.
There was good news for the City last week when German finance minister Wolfgang Schauble said that the EU should try to maintain London’s status as a financial hub after Brexit.
But his positive view is not shared by all. Christian Noyer, former governor of the Bank of France, said that ‘with the UK outside the EU, maintaining the hyper-concentration of EU financial activity in London would be a permanent threat to the EU’s financial stability’.
‘Our British friends should understand that the EU’s ability to regulate and control its financial system is an essential aspect of sovereignty and a key component of our future financial stability framework.’