Earlier this month, the UK recorded the highest inflation rate since 2012 for August of this year. The figure came in at 3.2% annually and rose by 0.7% from July, the largest jump on record.
But what does this have to do with the pound and more importantly, your overseas property purchase?
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Why was annual inflation so high in August?
Rising prices in recreation and culture, transport, housing and utilities, food and restaurants and hotels all contributed to the high inflation reading.
However, the Office of National Statistics was also keen to point out that this upward year-on-year shift has probably been accentuated by the discounted food and drink prices from last August’s Eat Out to Help Out scheme.
It is, therefore, unlikely that we’ll see a jump as large as this again in September, although some economists think that October’s and November’s figures could be high due to the pressure on supply networks as a result of the Delta variant and continued pandemic restrictions, as well as Brexit.
How could this impact the pound?
After this inflation data was released, the pound strengthened slightly against the dollar. However, could it have a longer-term impact on sterling?
Inflation is now well above the Bank of England’s target of 2%. Actions and comments from BoE officials surrounding this could have an impact on the pound going forward. If officials decide that action needs to be taken to combat rising inflation, then this could have a positive effect on the pound. Equally, if they take the view that this rise is temporary, then the pound could suffer.
Higher inflation is associated with hiking interest rates, and higher interest rates can attract foreign investment, which is likely to increase demand for the pound.
How will the Bank of England react?
As higher inflation is a sign that the economy is recovering, many are now left wondering if this higher reading could prompt the bank to take a more ‘hawkish’ stance towards monetary policy, meaning that they may hike interest rates sooner and withdraw monetary policy measures.
However, Andrew Bailey revealed just last week that the Monetary Policy Committee is divided over whether to hike interest rates. This suggests that whilst some officials may think a rise in inflation is temporary, others may be worried that it could pose a significant problem in the months ahead – hence championing the need to hike interest rates.
With inflation so high, Governor of the Bank of England, Andrew Bailey will be forced to write a letter to the Chancellor, Rishi Sunak, explaining what the Bank will do to bring the inflation rate back to target.
The currency markets will now await the Bank of England’s next monetary policy meeting, which is due to take place on September 23. Any comments following this regarding inflation, interest rates and monetary policy could have an impact on the pound.
How do the EU and US fit into this?
How the pound fares could also depend on other central banks, particularly the Federal Reserve and the European Central Bank. If the Bank of England leads the way with tapering monetary policy and hiking interest rates, taking action ahead of these other banks, this could boost the pound further.
At its monetary policy meeting last week, the ECB confirmed that it would begin to slow down its pandemic bond-buying programme. However, officials are still maintaining a cautious approach, with ECB President, Christine Lagarde saying this week that she still favours fiscal aid to support the economy.
The Federal Reserve also have a meeting next week, where they will resume their debate about when and how to taper their Covid-related bond-buying program. Initially, comments from officials suggested that the Fed would be the first central bank to take action, however, signs of a slowing economy thanks to a resurgence of coronavirus cases in the US have complicated matters.
How can you protect your property purchase from currency movements?
Although the pound is relatively strong at the moment, it’s impossible to predict how it will fare in the coming days and weeks. The Bank of England’s meeting next week could spell volatility for sterling, potentially having an impact on the price of your overseas property.
We can put measures in place, such as a forward contract, to ensure that your property buying budget is protected from this potential volatility. Contact our team on +44 (0)20 7898 0541 or fill in this short form.