In accordance to strategists at the major banks on Wall Street, Brexit would leave the UK with years of high inflation.
Uk Inflationary Pressures Are Spreading
Because of the economic harm caused by the choice to sever relations with the European Union, Citigroup Inc., Bank of America Corp, and Standard Bank all view the UK as an outlier in the industrialized world.
They predict that UK inflation will be greater than average due to immigration restrictions and supply chain disruptions, even as pricing pressures start to ease elsewhere. In a report released on Wednesday, pricing pressures were at a new four-decade high.
Even if the pound is trading close to a two-year low against the dollar, inflation is a major factor in investors’ pessimism. The cost-of-living crisis isn’t the result of Brexit, according to experts, but it will make it more difficult to solve in the UK than anywhere else.
With More Gains Anticipated, Uk Inflation Has Reached A New 40-year High
Brexit will make inflation in the UK stickier over the long term, according to Vasileios Gkionakis, head of European FX strategy at Citigroup. “More fiscal support is desperately needed, but that is unlikely because the economy is so weak.”
Consumer price growth accelerated to 9.1% percent in May from 9 percent a month earlier, according to data released on Wednesday by the Office for National Statistics. To $1.2243, the pound dropped by 0.3%.
According to experts, it can be difficult to determine if the pandemic or the fallout from Brexit is to blame for the UK’s economic woes.
According to some studies, Brexit is already having an impact. A paper from the London School of Economics claims that trade restrictions are to blame for the 6% rise in food costs in the UK.
Business investment has decreased by roughly 10% from its pre-coronavirus level.
There aren’t always obvious connections between Brexit, the economy, and inflation. According to Gkionakis of Citigroup, it’s feasible that in the short future, reduced growth in the UK may lessen price pressures brought on by Brexit. An additional unpredictability for investors is rate increases by the Bank of England.
Francesca Fornasari, head of currency solutions at Insight Investment, said: “The market is now telling us that the BOE will raise fairly aggressively. “If that turns out to be false, especially at a time when inflation is pretty strong, that’s one of the factors that could further devalue sterling.”
There are many reasons, in the opinion of Kamal Sharma of Bank of America, to continue to be unfavorable toward the pound. The economy is in dire straits, and politicized criticism of the BOE’s choices is rampant.
The UK would be left with this one large idiosyncratic shock, he predicted, as the epidemic headwind begins to weaken. That suggests you’re entering a phase of sub-trend development, which is bad for the pound in an economy that is heavily dependent on domestic demand for growth. the analyst said.
For the UK government, which has found it difficult to advance on trade accords, replacing access to the EU’s single market with labor and products from elsewhere remains a hurdle. Even though the UK reached its first deal with a US territory last month, the patchwork strategy indicates that negotiations are stagnating.
Most strategists anticipate that the pound will continue to decline. By the conclusion of the third quarter, according to Citigroup’s Gkionakis, the euro will have increased from its present level of 86 pence to somewhere near 90 pence.
In accordance with Steven Barrow, director of the currency strategy at Standard Bank in London, the BOE may need to raise interest rates in order to contain inflation.
“We believe there is every reason to predict that UK base rates will surpass those in the US when we consider the next 3 to 4 years, not just the next 12 months,” he said. The marketplace is not set up to handle this.