The GBP EUR exchange rate remained mostly unchanged this week after the Bank of England rate hike to 1.25% saved the pound sterling from earlier losses in the week. The Bank also said that UK inflation will rise to 11% in the autumn. The next inflation figures will be the key data set on Wednesday. The May figures will rise again from April’s 9% reading.
The GBP to EUR looked to the 1.1700 level for support again after a sharp drop below 1.1500 ahead of the BoE.
UK economy faces recession threat, house prices could slow
The Bank of England raised the UK interest rate to 1.25% on Thursday as inflation fears continue. The Bank said that inflation will rise to 11% this year. Tuesday’s employment numbers showed a 4.5% drop after inflation – the lowest since records began in 1991.
The housing market could suffer. Estate agents reported an uptick in sales during May as homeowners looked to cash out before rates rise further in the months ahead.
“In view of continuing signs of robust cost and price pressures, including the current tightness of the labour market, and the risk that those pressures become more persistent, the committee voted to increase Bank rate by 0.25 percentage points,” a statement from the BoE read.
The Bank of England says that inflation will hit 11% in the autumn, before a potential hike in the energy cap from Ofgem. Experts currently expect that regulator Ofgem could put up energy prices even further from £1,971 per year to around £2,800.
BoE governor Andrew Bailey said in a letter to Rishi Sunak explaining the inflation rate:
“…shocks have pushed global energy and tradable goods prices to elevated levels. Those price increases have raised UK inflation and, since the United Kingdom is a net importer of these items, will necessarily weigh on most UK households’ real incomes and many UK companies’ real profits.”
Northern Ireland protocol issues will drag on further
The Northern Ireland protocol issue weighed the pound sterling down. The European Union and European Commission restarted their dormant legal actions against the UK.
The situation could drag on further. Europe gave the UK two months to respond before it could be taken to the European Court of Justice.
Scotland’s First Minister Nicola Sturgeon said she would be happy with the current protocol: “As First Minister of Scotland, if I could get a protocol that would allow Scotland to continue to trade freely across the single market, I’d take that in a heartbeat so that is the reality.”
“The Northern Ireland protocol was negotiated and signed by this UK Government. It is also a protocol right now that is benefiting Northern Ireland. Northern Ireland’s economy right now is doing better than the economies of the other countries in the UK,” she said.
However, there is a chorus on both sides of the contentious agreement. The headlines and threats will likely continue in the week ahead.
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