Andrew Bailey, the Governor of the Bank of England, has stated that he expects inflation to decrease significantly this year. He believes that the decline in energy prices and lower food costs will contribute to this reduction in inflation for the remainder of the year. However, Bailey also indicated that the Bank will need to continue raising interest rates in order to address the strong economy and tight job market, which have shown unexpected strength. It is projected that interest rates may reach approximately 6.5% by March of next year, with a possibility of reaching 7%. Currently, the average fixed rate for mortgages offered by banks is around 6.7%.
On Thursday, it is anticipated that Rishi Sunak will support salary increases of approximately 6% for public sector employees in the fiscal year 2023-24. However, this approval comes with a condition that ministers must identify substantial savings from their Whitehall budgets. The prime minister emphasized that any pay raises for the current year must be responsible and not financed through additional government borrowing. He argued that such an action would contribute to inflationary pressures and prolong its duration.
In May, the UK economy demonstrated a stronger performance than anticipated, experiencing a mere 0.1% decline in GDP for the month. Considering the King's Coronation and the additional bank holiday, it was expected that the economy would be more significantly impacted, given that similar royal events last year resulted in temporary activity decreases equivalent to 0.7% of GDP in June and September. As a result, it is now unlikely that the economy will contract in the second quarter, and a modest growth of 0.1% is projected for the entire three-month period.
In June, inflation in the United States dropped from 4% in May to 3%, marking the slowest inflation rate since March 2021. This announcement resulted in a decline in the value of the dollar and underscored the Federal Reserve's effectiveness in managing inflationary pressures. It also potentially reduced the likelihood of additional interest rate increases. This positive development, as depicted in the recent data, contrasts starkly with the situation in other advanced economies like the UK, where the Bank of England is grappling with controlling an inflation rate of 8.7%.
Portugal's finance minister, Fernando Medina, has issued a warning about the potential consequences of additional interest rate hikes by the European Central Bank (ECB) on the euro-area economy, which is striving to recover from a recession. In an interview, Medina highlighted that inflation is already experiencing a decline due to the exceptional monetary tightening measures implemented by the ECB.
Both the pound and euro have made significant gains against the dollar this week with the pound reaching 1.3050 this morning, the highest level since April 2022. The Euro currently resides at 1.1160 which is the highest since Feb 2022. GBPEUR currently resides at 1.17