Depreciation of GBP poses upward risks to U.K. inflation, says Barclays

Lately markets have been difficult on the British pound, sending the sterling down 3 percent since July, adding to the already 3 percent depreciation in May-June, noted Barclays. Depreciation of 10 percent might result in around 0.5 percentage points additional inflation in the first year, 0.2 percentage point in the second year and 0.1 percentage point in the third year. While that is greatly dependent on the cause of the depreciation and also the macro and microeconomic backdrop, sterling’s recent drop however poses upside risks to the central bank’s inflation forecast to the tune of 0.1 to 0.2 percentage point over the next year, stated Barclays.

While that has few consequences for the rate call given the projection of inflation rapidly falling back to 2 percent early next year, it might give some fresh ammunition to the Monetary Policy Committee hawk calling for an immediate rate hike, stated Barclays.

If data stays strong and the currency depreciation is sustained, the Bank of England might raise its inflation forecast in the next inflation Report in November but it might toughen up its rhetoric at the next MPC meeting in September, added Barclays.

At 22:00 GMT the FxWirePro's Hourly Strength Index of British Pound was slightly bullish at 62.652, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 51.892. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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