Sterling recovered on Friday against the euro, regaining its midweek losses and ending up around half a cent up. It seems that the markets decided that the UK economy is going to power out of the current technical recession, without any need for early interest rate cuts.
A currency benefits from the usual laws of supply and demand. When the interest rate is up, investors earn more money from holdings in that currency and so they buy more of it and the currency strengthens. And the reverse is true when the interest rate falls.
The technical definition of a recession is Gross Domestic Product (GDP) falling for two consecutive quarters. But it looks like the recession will be short and shallow, based on forward projections of what is currently happening in the economy. Hence, interest rates might not fall very fast, as inflation looks like a bigger problem.
However, as several commentators have pointed out, while the UK’s GDP stayed generally in the positive, this is partly because immigration has been so high to the UK.
If you look at the size of economy per person (per capita), there have been seven quarters without growth. This is the worst performance for the British economy since quarterly records began in 1955.
According to the former chief economist at the Bank of England, the mistake in allowing inflation to rise so far and fast in the UK is now going to be compounded by lowering interest rates too slowly and squeezing even more life out of the economy. “That double blow to credibility is one – if I were a central banker, in my old job – I would be looking to avoid,” said Andy Haldane.
This is all a roundabout way of saying that the economy could be in worse shape than it looks and that interest rate cuts, when they come, could be fast and furious. That is likely to have a severe impact on the pound. However, as ever, bear in mind that when it comes to economic forecasting, the golden rule is that no-one really knows anything.
So, to fix the current rate, still close to the highest rate since the summer of 2022, do call your account manager on 020 8108 5163.
Later this morning we will hear from the current chief economist at the Bank of England, Huw Pill, and from the euro side, European Central Bank president Christine Lagarde this afternoon. Other than that, the week will be a little light on data. However, that tends to be when the shocks happen.
