The GBP EUR exchange rate slumped by almost 0.60% after the country’s growth came in worse than expected. The economy contracted by -0.3% and marked a second monthly decline after a -0.1% drop last month. The Bank of England meets on Thursday to announce its latest policy measures.
The GBP to EUR was trading at 1.1640 after the latest economic data.
UK economy unexpectedly contracts for a second month
Gross domestic product in the UK came in unexpectedly lower with a contraction of 0.3% which followed last month’s -0.1% drop. Those marked the first consecutive declines since the start of the pandemic.
Economists expected the country’s economy to grow by 0.1%. On the three-month average, an expectation for 0.4% growth came in at only 0.2% and sees the country inching closer to recession territory. It was also the first time since early last year that there was a downturn in all key sectors.
The Office for National Statistics reported that firms were seeing increases in the cost of production due to inflation.
Martin Beck, Chief Economic Advisor at the EY ITEM Club, said the data was a bad sign for the second quarter when a contraction is expected. However, growth is expected to pick up in the third quarter which will reduce the chances of a technical recession.
“But the growth outlook is poor. An already serious squeeze on households’ spending power will be negatively affected by the inflationary impact of global supply chain frictions and sterling’s recent weakness,” Mr Beck said.
The Bank of England now meet on Thursday to discuss monetary policy and they will have a bit of a dilemma on their hands as they consider further rate increases. It will now worry about further tightening to rein in inflation due to the slowing in the economy. Tomorrow also sees the release of employment figures for the UK with a forecast for 105k jobs added.
Former ECB Chief Economist talks of ‘muddled’ communication
Peter Praet, former Chief Economist of the European Central Bank, has talked of ‘muddled’ communication from ECB President Christine Lagarde.
Praet and another former Chief Economist, Otmar Issing, have both criticised the central bank recently over policy decisions.
The travel industry was hoping for better days after the pandemic but now faces rising wage inflation and higher fuel costs for airlines. Both were featured in articles by Politico. It was said that the key concern of former policymakers was that, “The ECB may hold back on lifting rates for fear that the political fallout on government financing of debt would be too severe.”
That is the real reason that ECB has moved slowly compared to other western central banks. The Europeans bought up boatloads of debt at zero per cent interest in risky countries like Italy and Greece. Those countries also financed their borrowing with those same zero per cent rates. The current rush to hike rates across the world’s central banks who got complacent about inflation risks.
Tomorrow also brings key data with the release of German inflation figures which could force the hand of the ECB. An increase to 7.9% is expected for Europe’s largest economy.
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