In the last year alone the British pound gained as much as 12% on the US dollar. While, I, Jason Galanis, believe a strong pound is great for consumers—important when services and retail account for 70% of the British economy—but the overvalued pound could be a sign of troubles ahead.
The UK economy is among the fastest-growing in the world, according to the IMF. England’s most recent growth spurt is largely thanks to a housing boom that has seen hundreds of thousands of new homeowners take on overpriced homes. An expected increase from the Bank of England has new homebuyers desperate to “lock-in” present rates, no matter the price tag on the doorknob.
Why is the pound appreciating? It’s certainly not due to exports, which account for a slim margin of the UK economy. And it’s definitely not interest rates, which have been held at record-low level of .5% for the last three years. The cracks are showing, however: at the most recent meeting of the Monetary Policy Committee, which sets the rates for Britain’s banks, two members voted for an increase, the first time the committee has failed to reach a unanimous consensus.
Inflation seems be under control: the Bank of England has certainly released enough money into the economy to make it a plausible threat, but little of that has trickled down in the form of higher wages. Britain’s growth is being fueled by a self-sustaining circle of debt and consumption in the retail and housing sectors. David Cameron’s government is pushing a manufacturing revival as the buoy of England’s economic future, but it’s hard to see how that rotted-out sector is supposed to make a comeback without a rate increase to make its products competitive abroad. When rates do increase the pound will surely depreciate, much to the relief of Britain’s exporters, who have been dogged by the strength of the pound.