A toxic cocktail of sluggish growth and high inflation, plus Brexit and fallout from the COVID-19 pandemic, is set to weigh on the British pound in the coming months, economists said.
Since the beginning of this year, the pound sterling has fallen by more than 7 percent against the US dollar, which is benefiting from rises in interest rates.
The pound has also fallen by 1.7 percent against the euro since the beginning of this year.
This comes despite the Bank of England having raised UK borrowing costs four times this year to fight inflation.
By contrast, the European Central Bank is waiting until July to raise its key interest rates for the first time in more than a decade.
British rate rises have “been insufficient to offset the headwinds weighing on the pound,” Rabobank analyst Jane Foley said. “Concerns about growth have been central to the poor performance of the pound.”
Fears of recession in the UK and elsewhere are gaining momentum as soaring inflation — fueled by rocketing energy prices — is affecting investment and consumer spending.
Oil and gas demand has surged as economies emerge from lockdowns, while supplies have been hit by the invasion of Ukraine.
Britain’s annual inflation rate stands at 9 percent, a 40-year high, while the Bank of England is forecasting the UK economy to contract at the end of the year.
The bank’s next rate decision is due on Thursday, when it is expected to raise its main borrowing cost above 1 percent.
“Hiking rates against a sharply slowing economy is never a good look for any currency,” Bank of America currency strategist Kamal Sharma said.
Whatever the financial cost of Brexit, “underpinning the market’s concerns about growth was the recent IMF projection that the UK is set to have the slowest pace of growth in the G7,” Foley said.
Other global financial bodies, such as the Paris-based Organisation for Economic Co-operation and Development, have also slashed growth outlooks for Britain, as well as for other major economies.
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