UK economy won't "double dip" but sterling could
Simon Ward
Post a Comment
Bank of England Governor Mervyn King now expects CPI inflation to reach 4-5% over the next few months. Even if Drs Sentance and Weale are able to convince a majority of the MPC (presumably not including the Governor) to vote for tightening, Bank rate is unlikely to rise beyond 1%. The real level of Bank rate, therefore, is heading deeper into negative territory and could reach minus 4.5% – the lowest since 1977.
Real policy rates moved from positive to negative in 1970 and again in 1974, with both movements followed by a large fall in the effective exchange rate – see first chart. The two currency declines were separated by a year-long period of stability, similar to the recent sideways movement. The second chart superimposes the fall in sterling from a December 1971 peak on the recent decline.
Will increasingly negative real rates scare off foreign investors and lead to a 1975-style second leg down for sterling, thereby further boosting import prices and entrenching the current inflation overshoot?
View Printer Friendly Version
Email Article to Friend
Reader Comments