Christmas shopping in London is an expensive affair

Inflation hardly attracts attention in the financial world anymore. In the eurozone this is because inflation is almost back to the ECB's target level. This is not the case in the United Kingdom. The Bank of England will face a difficult decision next week.

Many people choose to do Christmas shopping in a foreign city in the run-up to the holidays. This year, for example, a German Christmas market is a more tempting destination in this respect than shopping in London's Westfield or on Oxford Street. After Brexit, border controls often take longer and airline tickets are quite expensive. But it only gets really expensive when you consider that the pound has risen by 2022% against the euro since the end of 4. British inflation of 4,6% is also much higher than on the European mainland. Even with the more expensive pound, your purchasing power on a London shopping street may still be less than you might think.

European inflation under control
High inflation across the Channel is a much bigger problem for the Bank of England (BoE) than for anyone planning a day trip to London. Like other Western central banks, the British central bank targets inflation of 2%. Despite the fact that BoE Governor Andrew Bailey has raised interest rates earlier and further than the ECB's Christine Lagarde, British inflation is still significantly higher than on the continent. Preliminary figures show that inflation in the eurozone amounted to 2,4% in November. This level is expected to be just under 2% next year.

Monthly costs are skyrocketing
The United Kingdom is still a long way from that and the BoE faces a difficult decision next week. On Thursday, December 14, a decision will be made about the interest rate, which has already risen from almost 0% to more than 5% within two years. The higher interest rates are already starting to hurt many British households. It is customary to fix the mortgage interest rate for a few years at most. As soon as the fixed interest period ends, the monthly costs will increase considerably at the current interest rate. In addition, the higher interest rates make it less attractive for companies to borrow money for an investment.

Pound in 2024
High interest rates are putting pressure on the British economy in various ways. Economic growth is expected not to exceed 0,5% next year. There is therefore a good chance that the BoE will choose to keep interest rates at the same level, so as not to run the risk of steering the economy towards a recession. However, weak economic growth and the slowdown of the central bank do not necessarily mean that the pound will come under pressure any time soon. It looks like European interest rates will fall again sooner than those in the United Kingdom. And that growing interest rate difference could ensure that the pound continues to rise slightly in 2024, so that Christmas shopping in London will again be an expensive affair next year.

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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