The Euro has fallen against Sterling to approx. 87p on the news that Consumer Price Inflation rose sharply to 2.9% in the UK in December. Bloomberg report that
The CPI number is a shocker, said Peter Schaffrik, a co-head of interest rate strategy in London at Commerzbank AG. It means the Bank of England will have to rein in its monetary stimulus, perhaps sooner rather than later. We are avoiding gilts, especially at the front end. Its difficult for the market to outperform others against this backdrop.
From an Irish perspective, Mervyn King now faces a hobsons choice – to continue on the same course and allow UK inflation to run riot, increasing prices and reducing competitiveness north of the border – or he can take decisive action to reduce inflation (reigning in Quantitative Easing or raising interest rates) that will strengthen the pound against the Euro and thus increase prices (measured in Euros) and reduce competitiveness north of the border.
It’s almost certain at this stage that inflation will breach the 3% limit beyond which Mr. King must explain himself to the British Chancellor. I can almost hear the conversation – “Southern Irish shopping trips to Newry are sooooo last year.. um.. Darling”.