Pound slumps as stagflation fears stalk UK economy

Pound slumps to lowest level against the dollar this year as stagflation fears stalk the UK

Sterling sank to its lowest level against the dollar this year amid fears that Britain faces a nasty bout of stagflation.

The pound slipped nearly 1 per cent to as low as $1.3413, a level last seen in December 2020, as scenes of chaos on petrol forecourts continued.

Economists are worried that Britain’s recovery is slowing to a standstill, while prices are still rising – setting the scene for a painful spell of stagflation. 

The pound slipped nearly 1 per cent to as low as $1.3413, a level last seen in December 2020, as scenes of chaos on petrol forecourts continue

This is considered particularly dangerous for households, who have to deal with rising prices at a time when low growth leads to higher unemployment. 

It is feared the Bank of England could be forced to raise interest rates to tame inflation despite the slowdown in the economy.

Susannah Streeter, an analyst at Hargreaves Lansdown, said: ‘Fears of stagflation are stalking the financial markets, with the fuel and wider supply chain crisis threatening to slow recovery as businesses grapple with the ogre of sharply rising prices.

‘The worry that the UK won’t quickly break free from the constraints caused by driver shortages, and the bottlenecks of goods and raw materials, has seen the pound struggle to recover from its slide against the dollar.’

Valentin Marinov, head of G10 foreign exchange research at Credit Agricole, added: ‘Investors fret about the looming stagflation risks ahead that could scupper the UK economic recovery.’

Jordan Rochester, an analyst at investment bank Nomura, said the pound was ‘losing its inflation credibility’ amid scenes of empty supermarket shelves and dry petrol pumps.

Adam Cole, chief currency strategist at RBC Capital Markets, said the pound was possibly ‘starting to behave more like an emerging market currency’.

Typically, the pound would rise in response to increased expectations of an early interest rate rise. 

But sterling has continued to slide amid fears the Bank would be acting to tame rising prices at a time of weak economic growth rather than due to a strong recovery.

The pound was at one point the best performing G10 currency in 2021, boosted by high expectations for an economic rebound in Britain following the vaccination programme.

That has crumbled under the weight of a shortage of lorry drivers, which has hit supply chains, raising the spectre of disruptions and price rises in the run-up to Christmas.

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