Yesterday's inflation report, which showed price gains accelerating from an annual 1.5% in May to 1.9% in June, led to an overreaction in markets that sent the already overvalued pound higher yet again against the dollar, according to Chief Investment Officer Haig Bathgate.
Investors assumed that faster inflation than had been expected – a strong pound would normally mean slower price gains in the UK– will lead to the Bank of England raising interest rates sooner. And that increased the price investors are willing to pay for the pound because those prospective higher interest payments make it a more attractive currency to hold.
However, expectations of imminent interest rate increases are moving too fast. While the level of price gains is perilously close to the Bank of England's target of 2%, the reason for the increase is most like due to a range of factors, such as a spike in clothing and furniture prices and air fares, rather than a sustained overheating in the UK economy.
Indeed, Bank of England Governor Mark Carney has to be careful not to raise rates too soon (and therefore jack up the price of sterling further ) when Federal Reserve Chairwoman Janet Yellen has been hinting that rates in the US will remain low for longer. The strong level of the pound (it matched a six-year high against the dollar yesterday) is already making the UK economy unbalanced and hampering the ability of exporters to sell abroad.
Haig was speaking on BBC Radio's Good Morning Scotland.
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