Can Stronger Sterling Lead to More Interest Rate Cuts by the BoE? – Commerzbank

Will the stronger pound lead to more interest rate cuts by the Bank of England (BoE)? Does the recent strength of the British pound (GBP) mean that imported inflation will be lower and, conversely, that the Bank of England (BoE) will be able to cut interest rates more quickly? In principle, this is a very fascinating idea, and not just for the BoE, notes Michael Pfister, FX analyst at Commerzbank.

Inflationary pressure in the UK is now coming from services

“If central banks currently struggling with more stubborn inflationary pressures become relatively more accommodative, will the associated currency appreciation cause these inflationary pressures to ease? This, in turn, would lead to faster rate cuts. The best examples would be Norges Bank and the Reserve Bank of Australia, along with the BoE.”

“In the UK, almost all of the inflationary pressure now comes from services. The role of goods is less important. In fact, in recent months we have even seen outright asset deflation in some areas, which has contributed to the decline in the base rate. The slight turnaround that has taken place since then confirms our view.”

“Since the start of the year, the GBP has gained almost 5% against the USD. That makes it the best performing G10 coin by far, but it probably won’t be enough. GBP would probably have to appreciate much more for steady services inflation to narrow the gap between base rate and target.”