Bank of England to remain ‘dovish’ despite currency depreciation – The Peninsula

Bank of England to remain ‘dovish’ despite currency depreciation – The Peninsula

Doha: The Great British Pound (GBP) fell sharply at the outbreak of the COVID-19 pandemic, briefly to a level even below those seen after the Brexit referendum in 2016. Since then, the GBP recovered to a peak of 1.4 per USD in early 2021, but has recently experienced another sharp depreciation. The main reason for the depreciation is the divergence in communication and approach between the Bank of England (BoE) and other major central banks, such as the US Federal Reserve (Fed). Essentially, the BoE is being more accommodative (dovish) by hiking interest rates less aggressively than the Fed. This incentivises investors to shift their assets from the UK to the US seeking higher risk-adjusted returns, which puts downward pressure on the GBP.

Many central banks, including the Fed and BoE, are in a difficult position as they face stagflationary shocks, that both increase inflation and weaken economic growth. This means that interest rate hikes, necessary to control inflation, risk pushing the economy into a recession.

This week, QNB first compares inflation in the US and the UK, before delving into the outlook for GDP growth in both countries.

The disruption to energy supply from the war in Ukraine is the main difference