The sterling to euro exchange rate stands at 1.1666 today. This is close to yesterday’s three-weak low of 1.1636, its weakest since December 25th. The GBP to EUR interbank exchange rate remains lower, in part because we’ve learnt this morning that UK inflation rose by less than forecast in December.
According to the Office for National Statistics (ONS) today, UK price pressures rose by just 1.3% last month. This is below both markets’ forecasts for 1.5%, as well as beneath the Bank of England’s (BoE) official target of 2.0%.
Below-Target Inflation Points and Sluggish Economy Weighs on the Pound
This has weakened the pound, first because lower inflation traditionally points to a weakening economy. After all, when price pressures rose slowly, this suggests that businesses aren’t confident enough to charge their customers more. This often bodes ill for the UK’s GDP (Gross Domestic Product Growth).
Second, this has weighed on the value of sterling, because low inflation encourages the BoE to cut interest rates. This is because, when UK price pressure are low, there’s less reason to keep borrowing costs higher, to combat rising prices. As a result, it now looks more likely that the UK’s central bank will ease monetary policy, below its current 0.75% back to the all-time low of 0.5%, perhaps later this month.
Low Inflation Adds to BoE Case to Cut UK Interest Rates
In the last few days, several policymakers at the BoE have remarked that they may vote to cut UK interest rates, if Britain’s economic growth doesn’t pick up in early 2020. Speaking at a Research Workshop last Thursday, BoE Governor Mark Carney said that continuing low GDP growth could prompt a “relatively prompt response” from the central bank. Mr. Carney’s colleagues Silvana Tenreyro and Gertjan Vlieghe later echoed his remarks. So what with UK inflation further below target in December, the BoE may now feel it has more room to cut interest rates, thereby weakening the GBP.
Turning to tomorrow, we’ll learn Germany’s inflation figures for December, released at 07.00 GMT. These are predicted at 1.5%, still below the European Central Bank’s near-2.0% target. A figure above or below 1.5% has the potential to affect the GBP to EUR interbank exchange rate.
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