Since the EU referendum in June last year, the pound has taken the full impact of the weaker outlook for the UK and the Bank of England (BoE) has encouraged this by cutting rates, making the currency even less appealing.
In doing so, the BoE is openly playing the trade-off between the negative impact of inflation rising, which has hurt real incomes, and the positive impact of stimulating the economy and jobs through lower rates.
‘Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU,’ said Mark Carney, BoE governor, last month. ‘But it can influence how this hit to incomes is distributed between job losses and price rises.’
This balancing act is now looking decidedly lopsided, as there are clear side effects that come with the record low unemployment that, according to today’s figures, has been achieved.
Inflation is surprising to the upside and, on the back of low interest rates, the consumer savings ratio has fallen to dangerous new lows. Little wonder that some members of the BoE’s Monetary Policy Committee are breaking ranks, believing that the pendulum has swung too far. Higher rates look inevitable in the UK – and sooner than the market thinks, in our view.