UK Inflation Nears 6-Year High, Triggering GBP/NZD Exchange Rate Drop
The Pound has lost ground to the New Zealand Dollar and most other peers today, following a surprising increase in UK inflation.
The rise from 3% to 3.1% has put further pressure on the Bank of England (BoE) to adjust its monetary policy.
BoE Governor Mark Carney has already been forced to write to the Chancellor because of this development, explaining why inflation is 1.1% above the BoE’s uppermost target range.
In normal times, the BoE would combat higher inflation by raising interest rates, encouraging spenders to instead save their money, in turn reducing inflationary pressures.
Unfortunately, this isn’t an easy option at the present time.
Because UK wage growth is below the pace of inflation, UK consumers are currently suffering from a wage squeeze.
This has led to increased borrowing, which means that higher interest rates would increase repayment costs for those in debt.
The BoE might gain some breathing room from 13th December’s UK wage growth figures, which are predicted to show a rise in average earnings including wage growth.
If this reading increases by more than expected, the Pound might appreciate against the New Zealand Dollar.
New Zealand Dollar Advances on Trader Delight over New RBNZ Governor
The New Zealand Dollar has seen major gains over Monday and Tuesday this week, thanks to continued trader optimism about the future of the Reserve Bank of New Zealand (RBNZ).
The RBNZ has selected Adrian Orr as its next governor, who is due to take the office in March 2018.
Orr will be taking over from Acting Governor Grant Spencer, who in turn was the replacement for long-term Governor Graeme Wheeler who stepped down in September.
Economists generally consider Orr to be a safe pair of hands and quite ready to take the RBNZ into a new light under a new government.
Commenting on Orr’s appointment, former RBNZ official Michael Reddel said;
‘Adrian is pretty well known in markets.
It’s not someone who’s totally flaky leftwing, because no one’s had a clear sense of who was in the running and it could have been someone out of left field who is more strongly perceived as highly dovish’.
The week’s only really notable NZ news will come on Thursday evening, when a business manufacturing reading comes out.
On the month in November, expectations are for a decline in the reading from 57.2 points to 56.7.
The NZD could drop on such news, if trader optimism from Orr’s appointment has finally faded by Thursday.