Economists are warning that inflation could rise “above 3%” in the coming months that could prevent the Bank of England’s Monetary Policy Committee (MPC) from lowering interest rates.
The BoE inflation target is 2% and rising fuel, food and energy will help to push up the cost of living which could increase inflation to more than 3%.
Andrew Goodwin, chief UK economist at Oxford Economics, told Bloomberg, “We already thought inflation would be higher than the BoE forecasts this year, but the recent rise in energy prices means it’s likely to be higher still.”
Dan Hanson, chief UK economist at Bloomberg Economics, said, “The broader question for the BoE is what they focus on in the coming year if inflation is above target and unemployment is rising.
“The recent inflation episode taught us that inflation expectations can drift,” he said.
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“That means the Bank is unlikely to support the economy as much as it might have done had it been confronted with the same trade-off prior to the pandemic.
“The upshot is that it’ll be hard for it to shift away from gradual cuts.”
Deutsche Bank chief UK economist Sanjay Raja is predicting inflation will rise “above 3%” due to higher prices at the petrol pump and for gas and electricity.
“Our biggest worry from a BoE perspective, is that rising inflation to start the year pushes inflation expectations higher too,” Raja said.
“We’re already seeing higher energy and food prices seep into the consumers’ minds and this, we think, could cause some consternation around the policy path.”
Traders are preparing for “the pound to slump” by as much as 8% as it remains under pressure amid government borrowing.
Bloomberg reported, “There’s sizable demand for contracts that pay out below $1.20 — around 1% lower than where the currency was trading on Monday — according to data from the Depository Trust & Clearing Corporation.
“Some traders are even betting on sterling falling below $1.12, the weakest level in more than two years.”
Jamie Niven, a fund manager at the asset management firm Candriam, told Bloomberg, “The path of least resistance is lower at this juncture.
“On one side, you have very limited pricing in of Bank of England cuts, while the fiscal concerns are also sterling negative.”
However, Tony Redondo, founder at Cosmos Currency Exchange, has warned this could fall to $1.15.
“The pound has already fallen by over 2.5% against the euro and by nearly 5% against the dollar since Christmas,” he said in comments provided to Sky News Money by Newspage.
“Further falls are expected across the board. They are expected to be more muted against the euro given the stagflation fears that hover over the eurozone economy and the political paralysis in its two leading economies, Germany and France.
“Against the dollar, the pound could continue to freefall. Last Friday’s stellar employment data only adds to the idea gripping the markets that the Federal Reserve will move slowly in cutting interest rates in the US in 2025 in an economy that continues to outperform.
“Add in the fact that Trump’s inauguration is now just over one week away and the negative economic effect his tariff plans could have on both the UK and eurozone economies could see the pound trade at 1.15 or lower against the greenback.”
