Pound Exchange Rate Stalls _ Inflation News

Pound Exchange Rate Stalls - Inflation News

The pound today slowed its recovery against foreign currency on the back of lower than expected inflation figures published by the Office of National Statistics.

In addition, the Bank of England has said inflation could fall below its target of 2% next year - and might drop as low as 1% and even Gordon Brown was talking yesterday about deflation i.e.  negative growth.

What does all this mean?

In short, if the Bank of England feels that the ecomomy will contract too quickly, it gives it plenty of room to cut interest rates even further.  This year, the UK economy shrank for the first time since 1992, falling by 0.5% in the third quarter of 2008.  This led the Bank of England to lower base rates in October by 1.5% to 3% from 4.5% - its lowest level since 1955.

This makes the pound extremely unattractive to overseas investors and therefore, the pound suffers.  

Further interest rate cuts will pile more misery on our holiday pound but in the long run it may be exceptionally good for trading overseas and foreigners will fund it extremely cheap to buy UK services and goods.

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