Though the UK economy may appear very weak to British consumers who are facing tax rises and spending cuts, there are various reasons which explain why sterling has recently been stronger and could continue its upward movement.
Prospect of Higher Interest rates. With one of the highest inflation rates in Europe, and higher than US, there is pressure for the MPC to raise interest rates. Despite the Bank’s willingness to allow headline inflation rise above the target, if inflation remains persistent, they will be under greater pressure to raise interest rates. Increasing interest rates will make the UK an attractive place for international savings leading to a rise in Sterling. Currently many countries have very low interest rates offering savers little return, they would welcome higher rates in a country like the UK.
Economic Recovery.
The shock fall in output in UK Q4 2010 suggests a very weak recovery. However, if this proves to be mainly weather related, the economy may be able to return to positive growth and outstrip the Euro area where economic growth has been sluggish. However, with more spending cuts affecting the economy throughout 2011, it is hard to see a strong recovery in the UK. But, many analysts still feel that by May, UK interest rates will be starting to rise because we can’t maintain such a long period of negative interest rates (inflation higher than nominal interest rate 0.5% – 3.7%).
Government Borrowing
Despite the coalition, the UK has had strong leadership in tackling the budget deficit. This has removed the risk of nervous bond markets worrying about the government’s ability to pay it back. This generally makes the value of Sterling stronger. Markets have been reassured at the seeming stability of the UK
The outlook on the UK economy is still mixed, after a disastrous December, consumer spending was strong in January. UK exports have been doing relatively well, but, consumer spending is likely to be depressed by tax rises, spending cuts and weakness in the housing market (falling prices). Despite all this, inflation is stubbornly high because of cost push factors. The Bank of England are probably not enjoying their interest rate decision making process at the moment. The impact on Sterling will depend on whether a good recovery materialises enabling the Bank to increase rates without snuffing out growth. However, if economic growth remains subdued and cost push factors dissipate we could see a prolonged period of low rates.
The US finds itself in a similar situation of fragile recovery, undermined by cost push inflation, though in US, the inflation rate is lower and there is less pressure to raise interest rates.
The current rate is £1 to $1.611 dollar. Some analysts predict the Pound could rise to £1 to 1.7 dollars on the back of higher interest rates. The £ could perform even better against the Euro, as the Eurozone is struggling to deal with high deficits and recession in fringe members.
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hi can i ask some question?
“Why the agency or government owned company privatized and what have been the effects on tax paying citizens or consumer?”
ill wait for your reply,if you answer my question it helps a lot to me.thank you..