In the Asian session on Monday (June 12), GBP/USD fell back from its highs, temporarily reporting 1.2575, an increase of 0.04%. According to institutional analysis, compared with other central banks, the Bank of England may face the most severe policy dilemma. On the one hand, UK inflation is higher at 8.7%, with a tight labor market making wage-price spirals a perpetual threat. The International Monetary Fund, on the other hand, forecasts that the UK’s economy will grow by just 0.4% this year.
Bank of England dynamics
Interest rates are already squeezing the economy at 4.5%, while the market expects rates to exceed 5%, pricing in a 25 basis point hike in June. Howard Davis, former deputy governor of the Bank of England, said it would take about 18 months for policy to work. “We’re now entering a period where we’re starting to feel the effects of austerity.” The overriding issue right now, though, is credibility. Politicians have blasted the Bank of England for ignoring the threat of inflation, and it would be inexcusable to make a second mistake.
