AAA rating won't save sterling
- Last Updated on 09 February 2012
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Sterling is caught between a rock and a hard place. On one had the GBP continues to receive strong inflows due to the European debt crisis. The rejection of the new euro zone pact by Prime Minister David Cameron and the UK AAA rating support continued real money flows. The safe haven status of the GBP is highlighted by the yield on the 10-year gilt falling to a record low under the 2% level.
However, the UK economy continues to struggle. 2012 growth forecasts have been revised lower by both the Bank of England and the government. The BoE expects inflation to fall sharply over the course of the year with the risk of deflation creeping into the UK economy. The reversal of price pressures looks to have begun as headline inflation may have topped out in September at 5.2%. Thus the BoE is set to begin another round of quantitative easing (QE) in Q1 which will likely weigh on the GBP.