The strength of sterling


One of the reasons the Bank of England is slow to raise interest rates is the strength of sterling. As sterling rises against the dollar and the Euro, the two largest counter-party currencies for our trade, so prices of imports are kept down. Its acts as a constraint on our exporters raising their costs and prices, as they seek to compete in the world market against the background of a rising currency.  Most of the effects are benign.

A rising currency can also mean UK customers want to buy more imports, which get cheaper, and  more can afford foreign holidays. It means there is an added incentive for foreign investors to buy UK property and other assets, as they benefit from a currency gain as well.  A rising currency acts a bit like a rising interest rate, putting downwards pressure on domestic costs.

So why is this happening, and will it continue? For the moment it looks as if it might, as so far it is creating a virtu0us circle – lower RPI and CPI inflation, better growth, a higher currency. It is happening at a time when the UK has finished its Quantitative Easing money -0r money printing programmes. The USA is still continuing with its programme of money creation, though it is now reducing the extra amounts printed month by month. The Euro area is talking about taking more monetary loosening measures. If all else is equal those who print most of their currency should expect it to fall in value against those who do not.

Markets expect an earlier move to higher interest rates in the UK than in the USA, and are not even thinking about rises in Euro rates. There the last recent move was a further cut. Currencies tend to strengthen when expectations are of an increase in rates, unless there is a  underlying crisis forcing the increases.

It is good news that retail inflation is low, and even energy inflation has come down. The problem for the Bank is that asset inflation may continue even against a low general inflationary background. There remains the issue of fairness between savers and borrowers to consider as well. It is likely they will bring forward the first rate rise from the middle of 2015 as originally planned or hinted at.



  1. margaret brandreth-j
    June 21, 2014

    If the value of the dollar is still being watered down by QE doesn’t that imply that their recovery wasn’t as healthy as previously reported?

    The borrowing/ savers problem for the banks is a vicious circle for if money is not worth saving , it will temporarily help retailers by more spending, but the depositors will get into a pattern where they don’t save their money. It has to be worth investing rather than money being used for personal assets.

  2. ian wragg
    June 21, 2014

    Growth built on the premise of importing half a million foreigners each year. Per capita income reducing as wages are suppressed and tax revenues stagnant thus the deficit not reducing.
    Just a matter of time before another property bubble and a further reduction in living standards.
    Real growth in the economy is a myth and it will be exposed immediately after the next election regardless of who gets voted in.
    With the continued assistance of the EU, Britain can continue its decline into a cheap labour dumping ground for the worlds dispossessed and crooks who’s “umanrites” take priority over the indigenous population.
    Well done Dave.

  3. Lifelogic
    June 21, 2014

    Well with Labour likely to take power next May and still a huge government deficit & trade deficit and it is surprising there is such confidence around.

    The tourism minister now tells people to holiday at home, this as the government passport office is too incompetent to stick photos on nasty purple cardboard quickly enough. Not even for about £90 a time.

    I see that once again with an election near it is announced that:- The widespread use of static and car-mounted cameras to catch drivers who park illegally in England is to be banned, the government has announced. It says so-called “spy cars” have been used as a “cash cow” by councils, and it wants to end the “plague” of parking fines being sent in the post. Instead traffic wardens will have to fix penalty notices to windscreens. Councils will still be able to use the cameras near schools, in bus lanes and bus stops, and on “red routes”.

    So the nine million + muggings a year will continue as a very inefficient way to fund the very inefficient government and kill high streets – yet another broken promise.

    1. Jerry
      June 21, 2014

      @Lifelogic: “Well with Labour likely to take power next May and still a huge government deficit & trade deficit and it is surprising there is such confidence around.”

      The way senior Labour politicos are talking this morning they don;t seem to share your opinion LL, but who knows, even more so if disaffected Tories vote UKIP next may, talk about cutting ones own nose off to spite someone else!

      “The tourism minister now tells people to holiday at home,” No she did not, she was asked about holidaying in the UK, she of course backed the UK tourist industry – but you’ll probably only know that if you read the Daily Mirror, such has been the spin in much of the press;

      Ms Grant was asked whether the chaos gripping the Passport Office was an opportunity to sell British destinations.

      The Maidstone MP insisted: “I’m sure you will get your passport. I’m in no doubt, I’m very confident that people will get their passports.”

      But she added: “If they don’t want to go away, we have some fantastic places to visit and holiday not that far from here.

      “I think there’s a lot to be said for the ‘staycation’.”

      1. Bazman
        June 21, 2014

        Ha gridlock been the problem in London and a Labour minister had advocated the benefits of walking. You would have still wanted the spin of the press such as from the Daily mail to be as unbiased? Jerry Would not have pointed that one would we Jerry? A a bit like how Russia Today undermines everything, but never mentions Russian corruption and theft.

        1. Jerry
          June 21, 2014

          Bazman, what has the Daily Mail got to do with what was printed in the Daily MIRROR? Sorry but you really have lost me this time!

          1. Bazman
            June 22, 2014

            Not understanding again Jerry? Can you walk and chew gum simultaneously?

          2. Jerry
            June 22, 2014

            Bazman, when you are talking in my ear, no – you are far to confusing! 🙁

          3. APL
            June 24, 2014

            Jerry: “what has the Daily Mail got to do with what was printed in the Daily MIRROR?”

            Weren’t you trying to make the case recently that it doesn’t matter that a thing is written down, it’s what is said that matters?

            Suppose that invalidates all those legal contracts and puts legions of lawyers out of work.

            Well, each cloud has a silver lining.

          4. Jerry
            June 24, 2014

            @APL: “Suppose that invalidates all those legal contracts and puts legions of lawyers out of work.”

            Sorry APL, you comment said far more about you than it did about anything I’ve written, in fact I only hope you forgot to add the ‘smiley’ because if your comment was meant in anyway to be serious…

            Just to clarify, my previous comments else where were in relation to third party reporting by the media (especially newspapers), not legal documents, but then again if a legal document can be shown to contain half-truths and those half-truths were not only known about when the document was written but purposely constructed by those who wrote the document a court of law might very well let you ignore the said legal contract!

          5. APL
            June 25, 2014

            Jerry: “you forgot to add the ‘smiley’”

            Nope. ‘smiley’s’ are for girls. Real men don’t need to ’emote’.

      2. Lifelogic
        June 21, 2014

        She was very daft to conflate the two issues, she should just have apologised for the gross incompetence of the passport office and the huge expense of passports to boot – perhaps over two weeks take home wages for some families.

        Perhaps later she might have championed the many virtues of the UK for tourists, the museums, the landscapes, the coasts, the lakes, Wales, Suffolk, Cornwall, Devon, Yorkshire, Northumberland, London, Oxford, Cambridge even the midges of Scotland (while no passport is needed).

        It is just a shame the food is so very dreadfully industrial in 99.9% of establishments, deep fried rubbish, bottled sauces, and meals from factories often even worse than the supermarket ready meals. Bacon and Egg or Egg on toast or just an apple or banana so often the best available choice.

        But then it is becoming just the same in France (especially the north) and even Italy now. No double health and safely and EU over regulation are mainly to blame.

        1. Jerry
          June 21, 2014

          @Lifelogic: Perhaps LL, but I suspect that much of the media would still have spun the story to reflect their take on the passports issues.

          As for British food, you have a point, but a lot of Brits go all the way to the Spanish Costa’s to hunt done traditional British grub and warm beer, so it can’t be so common any more in the UK! 🙂

    2. bigneil
      June 21, 2014

      Your passport comments fail to mention how many were being handed out to all our new “citizens”. Also, today we read of half a million EU passports handed out by Hungary entitling even more to live here. No doubt lots of them will be here for their “entitlement” from the British taxpayer. Why doesn’t our govt just tell us how many days we have left before we implode – it plainly CANNOT carry on. Or will Cameron announce a 100% tax rate in an attempt to pay the ever escalating bill for foreign freeloaders that IDS is keeping suspiciously quiet about?

      1. Lifelogic
        June 21, 2014

        Indeed we cannot have uncontrolled immigration and generous benefit system.

        1. Jerry
          June 21, 2014

          Lifelogic, should we have uncontrolled migration and the generous benefit system that often follow such expats UK passport holders, certainly within the EU?

          It is strange how we never hear about the flip side to the same coin, it is one of the things that worry me about UKIP’s policies, the UK might well end up stopping the influx of EU(ropean) migrants but if we upset the apple cart to much the trains, plains and boats carrying these migrants out of Old Blighty could well be full of expats returning home – and such people will have every right to claim every single benefit and housing possible and they are entitled to them as if they had never left these shores. Just saying…

  4. Lifelogic
    June 21, 2014

    Perhaps the real problem are the high bank margins and lack of competition in banking due to the high barriers to entry. With the big five having perhaps 80% of the market.

    The banks are still able to lend out at very high margins even well secured, to customers with far better credit risks that themselves. The lessen for savers wanting a real return is surely to cut out these rip off banks where possible.

  5. Anonymous
    June 21, 2014

    Of course reduced inflation is good but workers with frozen wages are still experiencing increases put on top of prices which have already been highly inflated in recent years.

    How are we are we ever going to get wages up to meet prices if we continue to undercut our own workforce ?

  6. Roger Farmer
    June 21, 2014

    I have always had a rather jaundiced view of currency rates. I sense too much of the casino about the business of currency movements. There is nothing in it for the money dealers if values remain static. They only make profits if values change .
    Individuals in certain banks were artificially manipulating rates to give themselves a profit. Maybe this has been stopped but what is to stop governments through national banks from doing the same thing.
    Personally I am quite pleased that sterling is getting stronger, I am starting to get more euros for my pension. It should not worry large businesses because they buy currency well ahead to cover their imports.
    When you look at the state of the European economies vis a vie that of a growing UK economy I believe that sterling will continue to strengthen against the euro which I see as not worth more than Eu 1.50 = £1.00. Currently it stands at Eu 1.25 = £1.00. Such a drift will suit German business, helping it to export more, and might even help the southern European countries to attract more tourists. In effect giving them the devaluation they so desperately need. That said, one of the drawbacks of low end tourism is that the deals are all inclusive. The benefit does not spread to the shops and restaurants beyond the package hotel, which may not be owned by local people.
    All strength to sterling, it could be my turn at the trough.

  7. Brian Tomkinson
    June 21, 2014

    How is the deficit reduction plan going, not forgetting that Osborne promised to have eliminated it by 2015 before the last election? It’s even worse than the revised expectations according to the Telegraph:
    “Public sector net borrowing (PSNB), excluding one-off payments related to Royal Mail’s pension plan, bank bail outs and quantitative easing (QE) profits, stood at £13.3bn in May, according to the Office for National Statistics (ONS).

    This was £1.1bn higher than the £12.2bn expected by analysts, and £700m higher than the same month last year. “

  8. Brian Tomkinson
    June 21, 2014

    JR: “the UK has finished its Quantitative Easing money -0r money printing programmes.”
    Initially we were told that this ‘printed money’ would eventually be taken back by the BoE. It never seems to be mentioned now. What will be done?

    1. Denis Cooper
      June 21, 2014

      The new money the Bank created and used to buy the gilts, to the tune of £375 billion, can only be taken back out of circulation by:

      a) The Bank selling its holdings of gilts back to normal gilts investors through the gilts market; and/or

      b) The Bank holding the gilts to maturity so that the Treasury pays it not only the interest but also the capital sums; without

      c) The Bank either using the money paid by the Treasury, both as interest and as the capital sums on redemption, to purchase new gilts issued by the Treasury, or passing the money back to the Treasury as part of its profits, all of which profits are owned by the Treasury just as the Bank itself is owned by the Treasury.

      But I wouldn’t expect the present Governor to do anything which would constrain the ability of the present Chancellor to offer bribes to the electorate at the next general election, any more than the previous Governor resisted the plan to make sure that the previous Chancellor wouldn’t run out of money in the year leading up to the last general election.

      1. Brian Tomkinson
        June 21, 2014

        Thanks for your response Denis.
        I agree, our so-called ‘independent’ Governor will do nothing to stymie Osborne’s ambitions for himself. The rest of us can just know our places as nobodies, until they want our votes.

  9. Gary
    June 21, 2014

    I don’t know how you can be so confident in your analysis. You say the FED is tapering, but it looks like they are shovelling the bonds through Belgium instead:

    And now we know $29trillion(!) has been used to buy up global equity markets by central banks, according to the FT referencing this: :

    Central banks around the
    world, including China’s,
    have shifted decisively into
    investing in equities as low
    interest rates have hit
    their revenues, according
    to a global study of 400
    public sector institutions.
    “A cluster of central
    banking investors has
    become major players on
    world equity markets,” says
    a report to be published
    this week by the Official
    Monetary and Financial
    Institutions Forum (Omfif),
    a central bank research and
    advisory group. The trend
    “could potentially
    contribute to overheated
    asset prices”, it warns.
    Central banks are
    traditionally conservative
    and secretive managers of
    official reserves. Although
    scant details are available
    of their holdings Omfif’s
    first “Global Public
    Investor” survey points out
    they have lost revenues in
    recent years as a result of
    low interest rates – which
    they slashed in response to
    the global financial crisis.
    The report, seen by the
    Financial Times, identifies
    $29.1tn in market
    investments, including
    gold, held by 400 public
    sector institutions in 162

    Add in the confirmed manipulation of Libor, forex and gold, and I cannot share your optimism.

  10. John E
    June 21, 2014

    Over the long run Sterling must weaken while we continually run such an enormous trade deficit.
    Foreign buyers of UK property may end up disappointed when they sell and convert their winnings to their home currencies, not all being as weak as the Dollar and Euro.
    I would be looking at the current temporary Sterling strength as a selling opportunity, not a buying one.

  11. Stephen Almond
    June 21, 2014

    “There remains the issue of fairness between savers and borrowers to consider as well”

    Surely, you are joking?

  12. acorn
    June 21, 2014

    Capital inflows reflect an ongoing structural disequilibrium. Foreign capital will be attracted by the higher returns and the prospect of currency appreciation. In this environment, the exchange rate will be poorly anchored by fundamentals, which threatens the stability of the financial system.

    I am wondering if the BoE is signalling to foreign investors more than domestic. If for some reason all this hot capital pouring into London real estate etc, was to reverse on some scare or “event”; interest rates would be jacked up to stop capital flight out of the UK. That would be extremely painful.

  13. E
    June 21, 2014

    There remains the issue of fairness between savers and borrowers to consider as well.
    When was the saver last considered in this country?
    No-one seems to want people to save, there seems constant pressure from all and sundry to get us to borrow. Only this morning watching breakfast time TV there were adverts for pay-day loans, bank loans and a company offering to “improve” your credit rating so that you could borrow even more.

  14. P.Turner
    June 21, 2014

    Surely, in effect, money has been taken from those who save due to artificially low interest rates whilst money has been given to those who borrow through the same interest rate mechanism. How then do we correct this anomaly when any increase in interest rates may well tip those who borrow over the edge.

  15. Bert Young
    June 21, 2014

    When the £ is strong we have more control over the flow of money ; when the £ is weak there is very little we can do about it . Manufacturers and Service organisations are under an entirely different sort of pressure when the £ is strong – particularly when the economy is growing , they have more flexibility over their investments and can adjust their short term strategies with less risk . The problem only arises in the consumer sector and it is here where the determination of the Banks have a strong role to play ; they have always focussed and emphasised the property sector and , in the past , allowed far too much to flow in this direction . I think the Governor has played his card at the right time and focussed on the dangers of the “bubble” ; the Banks now must take a more cautious view with their lending and use the opportunity to build resilient balances . Turning the next corner depends on the Chancellor keeping a tight hold on public sector spend .

  16. Neil Craig
    June 21, 2014

    Would letting interest rates rise and keeping the £ down by printing money and paying off national debt not work as well and give as a better future?

    1. APL
      June 24, 2014

      Neil: “by printing money and paying off national debt”

      At the cost of destroying the worth of every participant in the economy.

      Interest rates ought to be higher than the rate of inflation. Keeping rates below inflation destroys capital in the economy.

  17. zorro
    June 21, 2014

    I agree that the strength of the pound is defined by the weakness of the dollar and euro as they still need to print in order to stimulate a recovery in economic activity. However, there is still a possibility that QE will be used to finance in a roundabout way the ongoing deficit and lack of enough tax receipts. I doubt that existing QE will be wound back, instead inflation will do the work and eat away at the amount over tine, and they will refinance in the long term.


  18. Colin
    June 21, 2014

    If the great financial crisis has taught us anything, surely it is that we must finally acknowledge that the people in charge have no idea what they are doing, and we must abandon the notion that men can sit in offices in capital cities and pull imaginary levers to “run” the economy. Central banks should be abolished, currencies should be denationalised as recommended by Hayek, and interest rates should be a market rate set by the supply of and demand for investment capital. The best economic policy any government can have is not to have an economic policy. Of course that would mean politicians giving up power, so I guess we can whistle for it…

  19. Denis Cooper
    June 21, 2014

    “Currencies tend to strengthen when expectations are of an increase in rates, unless there is a underlying crisis forcing the increases.”

    From my own observations over the years it seems pretty unpredictable what effect increases in interest rates would have on the external exchange rate.

    It need not be increases forced by a crisis, it could be increases because the economy is buzzing along but with indications that animal spirits should be dampened down a bit to avoid problems building up later, and by discouraging flows of money into the country that can have a negative effect on the exchange rate.

    But the trade-weighted sterling exchange rate still has a long way to go before it would cross the 100 mark, when sterling would be obviously over-valued on past experience.

    It was still only around 88 this past week:

    Its over-valued all-time high was 106.8 on January 23rd 2007, while its under-valued all-time low was 73.8 on December 30th 2008; 88 is about half way between the two.

  20. Kenneth
    June 21, 2014

    I can see a day not far off when the Chinese mint a currency in precious metals i.e. no paper.

    IMHO paper/digital will be trusted less and less in the future.

    1. petermartin2001
      June 22, 2014

      History shows just the opposite. 100 years ago the world’s currencies were nearly all on a gold standard. Now none of them are.

  21. Bazman
    June 21, 2014

    The rates savers receive will not change no matter how high the interest rates become as the banks do not need and even want savers money as they can get cheap money from the government to run their privately run state owned businesses and this money can be lent to house buyers and landlords as the returns are much better and the risks less.

  22. petermartin2001
    June 22, 2014

    The impact of the high pound on the government deficit needs to be considered.

    The high pound means that the UK will be able to afford more imports, but exports will be less competitive. Therefore both the internal and external deficits will increase

    Budget Deficit = Savings of Private Sector + External Deficit.

    The high pound is symptomatic of a net capital inflow due to the sale of gilts and other government securities to overseas buyers. These have to be recycled into the economy by deficit spending.

  23. Lindsay McDougall
    June 22, 2014

    “It is good news that retail inflation is low, and even energy inflation has come down. The problem for the Bank is that asset inflation may continue even against a low general inflationary background.”

    Yes, indeed, and you could make the same point in a different way. If the Bank of England ever resumes inflation targeting as a means of controlling the money supply, it should use a measure of inflation that includes ordinary day to day price changes but also asset price changes. It could take the idea further and include things like gold and fine wines, which the rich spend their money on.

    1. Denis Cooper
      June 23, 2014

      Believe it or not, the Bank of England has never been relieved of its obligation to meet the inflation target set by the Chancellor!

      1. APL
        June 25, 2014

        Denis Cooper: “the Bank of England has never been relieved of its obligation to meet the inflation target”

        It’s a meaningless obligation, since there is no ‘ or else ‘ should the bank fail to meet the obligation.

        So far as I understand the punishment for not meeting the target is to have to write a letter to the Chancellor.

        Poor old Mark Carney must be quaking in his boots at the prospect.

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