The United Kingdom’s inflation rate suddenly jumped from 1.2% to 1.8% in the last few weeks, knocking many economists off their initial theories that a 1% inflation would be relatively maintained during the 2020 budget’s active phase.
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However, there was a massive difference between the economist anticipation and the Bank of England plans. The BOE was aiming for a 2% inflation rate throughout 2020, and currently, the figure is below this goal. This means that the sudden jump is not going to derail the BOE’s stimulus package plan to the population, keeping the UK economy afloat for the months to come.
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However, although this was not massive damage to the economy, it is damage nonetheless, and much bigger than what the UK economy is used to even after the whole Brexit dilemma, which is still underway.
Economists predict that this sudden surge is going to be very short-lived due to lower prices on daily necessities as well as energy. Most of this anticipation though is based on bond yields which fell significantly on Wednesday 19th of August, showing decreasing effectiveness of government spending as well as a lowering interest in bond investments from the populace.
This might seem like a compelling argument, but the numbers don’t lie, economists were wrong at least once this year.
Guarantees from the BOE
The Bank of England has made dozens of announcements regarding the inflation issue in the second quarter of 2020. The announcements were mostly dedicated to ensuring the populace that stimulus packages will continue to be distributed and that the banks will do its best to maintain the competitiveness of the GBP in the global FX market.
Unfortunately, a a number of forex broker are seriously disagreeing with the promises, saying that the central bank should not interfere with the market’s evaluation of the GBP and let it fall relative to the USD rather than undertake bureaucratic machinations that could lead to much larger losses further down the line.
However, the reaction from the FX industry or FX traders, in general, was anticipated to be negative towards government interference as strategies have already been agreed upon and large trades have already been placed. The FX industry acts upon news or market changes within seconds of it being published. Therefore, interference from the BEO could be devastating at this point.
Support will slow down - but gradually
Although the BOE promises to continue its contributions to the UK economy through stimulus checks and monetary pumps, it’s unlikely that it will continue doing so at the same pace. As the economy gets more and more open even despite the growing Coronavirus cases the BOE will slowly start to re-direct its attention to more pressing matters, such as helping the GBP survive the January deadline for Brexit.
It’s not clear whether COVID-19 or the final Brexit agreement will bring the UK economy to its knees, but it’s almost guaranteed that both of these hits will land simultaneously, and at that point, it’s impossible for the BOE to pump endless cash into the economy and hope it works.
Supply will run low
No matter how much the BEO tries, there will simply not be enough cash in reserve to stimulate the economy very soon. And it’s not like the government is making back all of what it is giving away currently. Sure it will all come back, but that will take years. Considering the even further tax cuts to active businesses, the government will either bury itself in debt or end up in a situation where the majority of social projects, the 2021 budget, and other responsibilities will have to be severely reduced.
Not only these issues but the anticipated revamp of consumer confidence after the pandemic will require the BOE to take advantage of newly increased prices. This is something they may not be ready for.