The British pound is also celebrating a corona party

While Britain anxiously awaits the investigation into Prime Minister Boris Johnson's corona parties, the pound continues to rise. The rising interest rates behind that advance could become an even bigger problem for BoJo in the future than his lockdown escapades.

A few weeks ago hardly anyone had heard of her, but soon all eyes will be on Sue Gray. This British top official has investigated the way in which Johnson has violated his own corona rules. The tabloid press will undoubtedly enjoy her report on the 'lockdown parties' at 10 Downing Street. They vary from farewell drinks, Friday afternoon drinks to online Christmas quizzes. It will be exciting to see if Johnson manages to talk himself out of trouble again. If he's still prime minister in a few weeks, Johnson may face a very different challenge later in the year.

Johnson? No: Boo!
While all eyes are on Johnson, the pound is having its own party. Against the euro, the currency has risen by 2% since the beginning of December. And over the past twelve months, that profit is even more than 6%. That revival has nothing to do with Johnson's escapades and everything to do with the policies of the British Central Bank. The Bank of England (BoE) has already raised a quarter of a percent in December. There is a very good chance that another quarter of a percent will be added during the meeting next Thursday. These interest rate hikes are necessary to curb inflation, which rose to more than 5% in the course of last year.

Inflation gets a boost first
The high inflation is partly temporary in nature. For example, the price for a barrel of Brent oil has skyrocketed 60% in the past XNUMX months. If that doesn't happen again, the effect of higher fuel prices will gradually fade. But that takes time. Before that, inflation could rise a little further since Johnson has withdrawn all corona rules. As many distribution chains are still under pressure due to container shortages and the aftermath of Brexit, the growing economic activity could soon translate into rising prices. A new rate hike is a stepping stone for the BoE to turn off the money tap in other respects as well.

Who will buy British government bonds in the future?
In recent years, the bank has bought hundreds of billions of pounds of government bonds and other assets. A first step is to stop automatically making new purchases as soon as these bonds are redeemed. Subsequently, consideration can be given to phasing out the considerably expanded balance sheet. The big question is which parties will then turn out to be major buyers of British government bonds. It is already apparent that these parties want a higher interest rate than the 1,1% that is now paid for ten-year bonds. And that higher compensation will soon translate into heavier interest burdens for the British government. For the time being, however, currency markets are paying much more attention to the upcoming interest rate hike than to the rising British financing burden and Johnson's corona parties.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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