The gains came after Bank of England (BoE) Monetary Policy Committee member Silvana Tenreyro said raising interest rates to counter increasing prices in certain areas, including the energy sector, would be self-defeating if the increases turned out to be one-offs.
Tenreyro said she viewed the current surge in UK inflation levels as being temporary and offered little concern about the prospect of inflation persisting over the coming months.
Tenreyro on UK inflation
In a virtual meeting with Welsh businesses, Tenreyro said she differed from her former MPC colleague, Andy Haldane, who had said inflation expectations risked moving substantially higher as a result of the ongoing economic shock.
“Assuming this is just a one-off effect, trying to respond to that would only succeed in making inflation more volatile, since the effects of energy prices would have faded by the time policy was able to have an effect on inflation," she said.
“What we are also seeing is temporary supply disruptions caused by the various imbalances in the global economy as it recovers from Covid. Some countries are still locked down and others are reopened. Demand is also being boosted far more by fiscal stimulus in some countries than others, like the US where there is a big fiscal stimulus in place,” she also told a cross-section of businesses.
Economics research group, RaboResearch, sent an analysis by email to Capital.com and said the backdrop of lagging economic growth in the UK combined with less monetary and fiscal accommodation is a concern for sterling investors.
“On top of this Brexit continues to feature in the headlines given ongoing tensions with French fishermen and in view of the disagreements between the EU and the UK with respect to the Northern Ireland protocol. Northern Ireland politics tend not to have a significant impact on the pound,” RaboResearch said.
“That said, on the margin this news-flow provides an additional disincentive to sterling investors. We expect euro/pound to hold close to the 0.85 level in a three-month view. We expect US dollar strength to keep cable in the 1.36 area on a three-month view,” it added.
Data not denting BoE bets
The comments come off the back of August’s monthly report of gross domestic product. GDP grew 0.4% month-on-month, slightly below consensus, while industrial production grew more than expected (0.8% month-on-month).
“We think rising bets on a Bank of England rate hike this year should continue to offer a positive underlying narrative to pound (and offset the Brexit-related news) and keep euro/pound below 0.8500 in the coming days,” ING financial analysts told Capital.com by email.