shaky balance for the pound sterling

The willingness of the British central bank to raise interest rates relatively quickly and convincingly has given the pound a significant boost. However, the growing danger of recession is rapidly changing this picture.

In Great Britain, just like in the Netherlands, inflation is soaring. The big difference is that across the Channel they have found a scapegoat for the sharp decline in purchasing power. Andrew Bailey has become the head of the beach. According to conservative politicians, the chairman of the Bank of England (BoE) has fallen asleep at the wheel, so to speak. The central bank would also be helpless and unable to do anything about inflation, which threatens to touch 10% this year.

In the currency world, rising inflation is often a tailwind for a currency. In most cases, this leads to interest rate hikes. These make it more attractive to hold assets in the relevant currency. In the case of the pound, however, there is more to it. Inflation is so high that it threatens to disrupt the economy. Reports recently emerged from Loughborough University that an average household with two children can spend as much as £400 more per month on living expenses.

No money to eat
This indicates that British citizens are already dealing with inflation close to 13 percent. News channel Sky reported on the basis of its own investigation that one in four Britons sometimes skips a meal because otherwise they would not be able to get their money's worth. In addition, in many households the stove is sometimes turned off for some time in order to keep energy costs under control. If households have no money for food and energy, it shows that there is very little left for other things.

Companies also suffer from large price increases and staff shortages, increasing the risk of a recession. In a recession scenario, the BoE has little room to raise interest rates further under its current plan. Then it is only to be hoped that inflation will fall again of its own accord. That could happen just like that, because the current high level hides a whole lot of temporary developments.

Will there be a recession?
You can think of natural gas and oil scarcity as a result of sanctions against Russia and all kinds of supply problems due to lockdowns in Chinese (port) cities. It seems only a matter of time before energy prices stabilize – especially as the recession scenario approaches. China is also taking steps to gradually lift lockdowns. For now, however, all the uncertainty is causing quite a bit of turbulence around the pound.

In addition, the effect of the Brexit agreement is also a source of unrest. Last week, the United States even warned that the country's handling of the Northern Ireland issue poses a threat to the trade deal. After the pound took a small step back in recent weeks, the currency world can prepare for a hot summer for the pound.

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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