Currency Watch: No stopping inflation juggernaut

Currency Watch let you know a couple of weeks ago that inflation would be the buzz word of 2011 and the problems in the MENA (Middle East, Northern Africa) region have both exacerbated and proven the problem.

At the time of writing, a barrel of Brent crude is trading at US$116 – a two-year-high as traders and industrials drive the price onwards.

This, of course, will flow through to producers and manufacturers and then on to us at the till, raising prices and hurting our pockets further.

There is, unfortunately, very little that we in the UK can do about it. This is inflation that cannot be helped by an interest rate rise, although the latest Bank of England minutes showed 3 Monetary Policy Committee members voted for a rate hike at the February meeting.

This heightens the chance that we will see an interest rate rise in May as opposed to later in the year. Most members agreed that the case for withdrawing the stimulus in the form of the £200bn of quantitative easing and the ultra-lax monetary policy had strengthened.

The upcoming reappraisal of Q4’s GDP figure will be key to the market’s mentality in the coming weeks and could see this newly-found hawkishness nipped in the bud.

I personally believe that the UK economy could still do with some months of further growth before we start stepping on the monetary policy brakes.

The likelihood of a rate rise has helped the pound in the past couple of weeks however and does form the basis of our predictions of a strong GBP year.

Jeremy Cook, chief economist at World First foreign exchange, 25.02.2011