"The further improvement in many of the timely business surveys suggests that the economy will continue to grow strongly in the fourth quarter"
- Samuel Tombs, an economist at Capital Economics Ltd.
Last week the cable soared to 1.6441, the highest since August 2011, while the Sterling's trade-weighted index was 9% higher than its recent March low and was hovering around its 2009 high. The reasons for Pound's strengthening are easy to divine. The latest fundamental reports showed the economy is building up steam, suggesting the central bank will be forced to raise interest rate sooner than planned. When the current coalition took office, they pledged to build economic expansion on higher exports and investment, and switch from the growth led by public sector and consumption. The strong domestic currency, however, runs completely counter to this objective. There are definitely winners from higher exchanged rate, as anyone importing goods and services will have to pay less for what they buy, while Britons visiting other countries will be able to get more foreign currency. Nevertheless, it tends to retard export performance, and on the other hand, increase imports, resulting in a drop of GDP, employment and income.
The overstrong Pound has caused a devastation in British industry, when Margaret Thatcher came to power in 1979, and later, when Labour took power in 1997 it happened again. While rules of the G7 will not permit the BoE to introduce an official cap on the currency, maybe policymakers should establish and informal one and be ready to intervene on the markets to sell pounds when necessary?
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