UK pound is losing ground again after recent gains. Sterling is heading mostly lower against its major counterparts as excitement over recent inflation data fades and as the EU referendum once again dominates the spotlight.
Earlier, the sterling was doing well in currency trading on the FX market, making some gains. The recent inflation report, while not providing a huge amount of support, at least offered a boost. Most of that is done away now, and the UK pound is back down against many of its major counterparts.
Worries about the UK economy continue to plague the sterling, as does general risk aversion. Stocks are mostly lower around the world, and that weighs on the UK pound. Not only that, but the recovery for the UK economy continues to move at a slow pace and the BOE is reluctant to raise rates.
Twelve-month CPI inflation increased to 0.5% in March but remains well below the 2% inflation target. This shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to fade over the next year. Despite picking up, core inflation also remains subdued, a consequence of the past appreciation of sterling, weak global inflation and restrained domestic cost growth.
Returning inflation to the 2% target requires balancing the potentially lessening drag from external factors against expected gradual increases in domestic cost growth. Fully offsetting that drag over the short run would, in the MPC’s judgement, involve too rapid an acceleration in domestic costs, one that would risk being excessive and would lead to undesirable volatility in output and employment. Given these considerations, the MPC intends to set monetary policy to ensure that growth is sufficient to return inflation to the target in around two years and keep it there in the absence of further shocks.
The MPC set out its most recent detailed assessment of the economic outlook in the February 2016 Inflation Report. Taking together all of the recent economic developments, the broad outlook for activity and inflation appears little changed.
There has been mixed news on near-term prospects for global growth. Immediate downside risks around Chinese activity have lessened; in the United States, indicators of GDP growth in the first quarter of the year have been disappointing, but those for the second quarter are more encouraging. Movements in the prices of risky assets suggest that investors have regained their risk appetite, possibly reflecting more positive global economic data and policy action by central banks. Nevertheless, given weak supply growth, the Committee continues to expect global growth to be somewhat subdued by historical standards.
Sterling has depreciated further over the past month. Risk-free interest rates in the United Kingdom and elsewhere have also declined. Together with rises in the prices of many risky assets, these movements should support economic activity. That said, the likelihood that much of the fall in sterling reflects uncertainty surrounding the forthcoming referendum on the United Kingdom’s membership of the European Union raises questions regarding whether the lower level of sterling will persist and its net economic impact.