The British pound exchange rate has gone on a roller coaster ride in recent months. It has fallen to a new low against the dollar, hit a record low against the euro, and risen to an all time high against the yen. But the pound is still under pressure, and analysts say it’s likely to remain vulnerable to further losses.
Britain’s economy has fallen into recession. In the third quarter of 2017, UK GDP declined 0.2%. And UK unemployment has been rising. Although the government’s Growth Plan includes ambitious plans to cut taxes, it may not be enough to revive the economy.
Since the Brexit vote, the pound has been driven down by falling economic data, aggressive Bank of England interest rate hikes, and increased borrowing costs. In fact, UK household debt reached 420% of GDP in 2011. This is the highest level since the financial crisis in 2007. If a recession were to develop, the cost of insuring government debt would rise to the highest level in more than two decades.
The pound fell to a 37-year low against the dollar on Friday. That’s down from a high of $2 in 2007 before the financial crisis. As a result of that, the Bank of England raised the Bank Rate by 75 basis points. A key policy decision is set for next week. Whether the BoE hikes rates again is unclear.
In the third quarter of 2018, UK inflation accelerated to its highest levels in over 40 years. It reached 10.1%, and consumer price inflation is expected to peak at around 11 percent in the current quarter. At the same time, government borrowing rose to a record level.
The Office for National Statistics reported that retail sales in August fell 1.6% month over month, and the Confederation of British Industry found that retail sales fell by more than expected. Meanwhile, oil prices further impacted manufacturing profitability.
In response to these issues, the Bank of England has been aggressively hiking interest rates to control inflation. However, it’s also faced the difficult task of determining what to do with the resulting borrowing costs. These rates may have to be hiked even higher, which could push the pound lower and make imports and exports more expensive. Ultimately, the Bank Rate is a key determinant of where the pound will settle, but a weaker pound can make inflation control harder.
Britain is a founding member of the G7 and the Organization for Security and Co-operation in Europe. In addition, it is a founding member of the Asian Infrastructure Investment Bank. While the country has been able to weather the Great Recession, it is now facing a self-inflicted financial crisis.
Last week, the Bank of England announced that it was increasing interest rates by a total of 75 basis points. It also said that it expected the rate to stay above 11 percent for several months. During that period, the Bank of England expects to see a slow recovery from recession.
