The pound sterling has made slight gains over the week. However, GBP remains in a downtrend. Growing inflationary and geopolitical risks are putting pressure on the British currency, forcing the Bank of England to change its earlier plans. Inflation in the UK has reached the highest point in 30 years, cancelling the plans of the British government. In February, consumer prices added 6.2%, and producer price inflation reached 10.1%. The government planned to impose the highest taxes in years next month to help economic recovery and prevent inflation from spiraling out of control. Originally, the national insurance rate was to be increased by 1.25%, which would contribute £12 billion to state coffers. However, this plan was suspended due to difficult economic situation, UK finance minister Rishi Sunak announced on Wednesday, March 23.
Furthermore, the government reduced payroll taxes, cut the basic rate of income tax, and decreased the fuel duty. These measures are aimed at helping poorer families cope with rising prices. However, these plans are unlikely to affect the actual economic situation. According to projections by the Institute of Fiscal Studies (IFS), the cost of living for the poorest could rise by 10%, while their benefits will increase by just 3.1%. The Bank of England estimates that inflation could rise to 8% in April. However, its actual level exceeds these projections. This situation is detrimental to the pound sterling in the long term. GBP is currently struggling to hold its current fragile position. Amid a protracted price increase, the British pound decreased on Thursday, March 24. GBP is fluctuating up and down, which are unbalancing the pound sterling's price dynamics. GBP/USD was moving within the 1.3214-1.3215 range early on Friday, trying to escape the downward spiral.
Analysts at Morgan Stanley recommend staying short on GBP, as markets price in too much tightening from the Bank of England this year - up to 5 interest rate increases in 2022. Many economists are cautious with their outlooks, because the UK economy is in a difficult situation, and its currency is far from stable. The Bank of England is conducting its current monetary policy in accordance with the challenges at hand, adjusting it depending on the current situation. The UK central bank has increased the key rate 3 times over the past 4 months. The hikes helped GBP advance against EUR, but weakened GBP/USD. Experts do not rule out another increase at the next BoE meeting on April 14.
The economic slowdown in the UK and geopolitical uncertainty demands caution in making key decisions from the Bank of England. As real disposable income falls and energy prices soar, the UK economy is expected to weaken. Earlier outlooks suggested inflationary pressure would peak in April, with prices reaching 8%. However, stronger negative tendencies in the economy could send prices skyward throughout the year, experts predict. The Bank of England suggests further monetary tightening is appropriate amid skyrocketing real inflation in the UK.
