The GBPEUR exchange rate was higher again after Germany saw a larger than expected decline in unemployment figures. Eurozone inflation also came in as expected and failed to move the euro. Outgoing economist at the Bank of England, Andy Haldane, delivered a parting shot to the bank as he talked of 4% inflation.
The GBPEUR is trading above 1.1660 after it looked like a test of 1.16 was coming.
Unemployment declines more than expected in Germany
Germany’s unemployment situation decreased more than expected in June after restrictions were relaxed, according to the Federal Labor Agency on Wednesday.
The number of Germans out of work declined 38,000 in June from the previous month, larger than the expected fall of 20,000. Unemployment had also decreased 19,000 in May.
However, the unemployment rate was unchanged at 5.9% for June, in line with expectations.
“Unemployment and underemployment continued to fall sharply,” said Federal Employment Agency CEO Detlef Scheele. The companies are further reducing short-time working and are looking for new staff again.”
Carsten Brzeski, an economist at ING, said that the high number of short-time workers was still a reminder of potential risks going forward, even if those risks look less threatening by the month.
Inflation numbers were also released for the eurozone, but they came in as expected. Consumer prices were higher by 1.9% from a year earlier, down from a two-year high of 2% in May. Core inflation, which is less volatile and excludes food and energy, slowed to 0.9%.
Haldane sees UK inflation at 4%
The Bank of England’s outgoing chief economist has warned that inflation is “rising fast” and could reach nearly 4% this year.
Andy Haldane was speaking just one week after the Bank’s Monetary Policy Committee (MPC) dismissed the recent rise in inflation as “transitory”. The UK saw consumer prices hit 2.1% and was above the bank’s 2% target for the first time in two years. The MPC said that it expected inflation to go above 3% “for a temporary period”.
However, Mr Haldane, seen by many as an outlier in the bank, cautioned that the risk is higher and “everyone would lose”.
“Overall, inflation expectations and monetary policy credibility feel more fragile at present than at any time since inflation-targeting was introduced in 1992,” he added.
“By the end of this year, I expect UK inflation to be nearer 4% than 3%.”
“If this risk were to be realised, everyone would lose – central banks with missed mandates needing to execute an economic handbrake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs.”
The inflation issue is a problem for central banks as they would have to raise interest rates and unwind stimulus at a time when the economic recovery is still fragile. Higher rates would drive up servicing costs on record levels of debt that have been built up by governments during the pandemic.