Inflation in the UK is worsening as the British pound continues to dip

By:
on Sep 22, 2022
  • Bank of England to announce decision whether to hike interest rate by 50 or 75 basis points
  • Inflation in the UK is expected to hit 13.3% by the end of 2022
  • British pound hits 37-year low and currently in "doom loop."

The Bank of England is expected to make an important decision this week as it contends with the impact of the latest government energy cost plan, which has changed the inflation outlook and the plunging pound.

Monetary Policy Committee to hike interest rate

With the Monetary Policy Committee expected to reveal its latest move on Thursday, analysts are uncertain whether there will be a 50 or 75 basis points interest hike, as reported by Invezz on September 19th. According to initial numbers released by the Office for National Statistics, headline inflation in the UK dropped to 9.9% annually in August, down from 10.1% in July, thanks to gas prices drop.

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The terms of a fresh government economic plan, which would include a ceiling on home energy costs, are expected next week. However, experts are unconvinced that this indicates that inflation is yet to peak.

The Bank of England predicted at its most recent meeting that inflation might reach 13.3% by year-end, with firms like Goldman Sachs (NYSE:GS) and Citi (NYSE:C) predicting absurdly higher consumer price index (CPI) readings in 2023. The Bank’s predictions for inflation will probably be reduced due to the administration of incoming Prime Minister Liz Truss announcing new policies.

TD Securities Strategists: British pound in a “doom loop”

Last week the British pound hit a fresh 37-year low versus the dollar following concerns about the economy as Britain’s cost of living crisis starts to put pressure on activity. Surprisingly the Bank of England cannot do anything to prevent the decline of the British pound, according to TD Securities strategists who expect more losses in months to come.

The strategists indicated that the soaring gas prices feeding into low currency values and weak economic growth have trapped the pound in a “doom loop.” They predict the British pound to drop to $1.11 by the end of this year which is a 3% loss from current levels. However, the Bank of England wishes to slow and finally reverse the loop, its monetary policy that will minimise the slowdown in the coming months because policymakers can’t bridge the energy deficit.

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