October 2nd, 2014 Guest post by Jay Hawk at Orbex.
Bank of England policymaker and former U.S. White House advisor, Kristin Forbes said that the downward pressure the Pound is exerting on UK inflation could start fading and that a risk exists of an increase in wage growth. In her first speech since beginning at the BOE in July, Forbes said that, “Sterling’s past moves have reduced the risk of inflation increasing sharply, despite the strong growth in employment and the overall economy”. She continued, ““The effects of sterling’s appreciation in 2013 through early 2014 will also not fade away as quickly as a midsummer night’s dream. But as these calming effects on inflation gradually dissipate, it will become even more important to monitor prospective signs of domestic price pressures to avoid the troublesome inflation sprite.
Forbes has voted to maintain the BOE’s Official Bank Rate at 0.50%, nevertheless, two members, Martin Weale and Ian McCafferty have voted to raise the rate to 0.75%. The MPC will make their next rate decision at their monthly meeting on October 6th-7th. While the UK economy has made significant progress, the strength of the Pound Sterling has put pressure on inflation. Forbes said that, “Although this dampening effect fades over time, the simulations suggest that the drag could persist for several more quarters”. Forbes continued, “The key implication is that sterling’s appreciation that began early last year is still dampening inflation today.”