Strong pound ‘could halt further rate rises’

Gerrard analyst Simon Rubinsohn says the strength of the pound could make it hard for the Monetary Policy Committee to justify more interest-rate rises and the Bank of England’s inflation report has failed to take account of it. On Friday sterling reached an 11-year high against the dollar. But Rubinsohn says the latest quarterly report on prices, published last week, says the effect of the currency is a “major caveat” in its analysis. The Bank says economic growth will exceed 3% this year and inflation will hit its 2% target within the next two years. Rubinsohn says: “I do believe that the currency situation is going to be a driver of prices. It is going to make it that much harder to justify interest-rate rises. It will become a factor if the economy does not improve as the Bank is predicting.” Rubinsohn says the report also fails to take account of the prospect of house prices continuing to rise. This could present an upside risk to inflation, he believes. The analyst, who has rates rising from their current 4% to 4.5% by the end of the year, says: “It presents a picture in which the economy is growing strongly but inflationary pressures are not necessarily going to re-emerge, but hang around the 2% mark at the end of the two-year period.” He adds: “There is the presumption that property prices will fall to zero in the two-year period but it may not prove to be accurate. If the property market is more robust then you could expect growth to be stronger and it would be a fair assumption that inflation would be higher.” Tony Dolphin, Henderson Global Investors director of global economics and strategy, says the Bank’s growth expectations are too high. He believes the figure is more likely to be 2.5%. As a consequence he says its expectation on inflation is pessimistic. Dolphin says: “Our forecasts are that inflation is going to stay below 2% even without any further rate rises. Inflation has been under 2% every month for the past two years bar a couple of months.”