Strong pound could push Bank of England to cut interest rates

Tim Wallace
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INTEREST rates were held at 0.5 per cent by the Bank of England’s monetary policy committee (MPC) yesterday, with economists predicting they will stay low for another year.

Although the economy is growing strongly, inflation is low which means the Bank is in no hurry to raise rates.

Some economists believe the MPC will want to keep rates low or even chop them further, in a bid to weaken the strong pound, which they fear may be hurting growth.

Such a move would weaken the pound against currencies including the euro and the dollar, providing a spur to exporters and – by making imports more expensive – push inflation back closer to its two per cent target.

Alasdair Cavalla from the Centre for Economics and Business Research argues that this is a dilemma for UK and US policymakers, who are in a similar position.

If UK and the US were “to cede to this pressure [to raise interest rates, it] would push them in the opposite direction to most other major central banks, almost all of which are loosening monetary policy,” said Cavalla.

“The consequent upward pressure on US and UK currencies [since expectations of a rate rise are enough to prompt speculation] threatens to make exports less competitive as well as pushing inflation further below target through cheapening imports.”

He expects interest rates will be held down until early 2016.

The Bank of England targets inflation of two per cent, but prices are currently flat and may fall over the coming months.

As this is the result of factors including falling oil prices, this is widely considered to be so-called good deflation, boosting consumers by increasing their spending power.

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