Bank of England Warns Strong Sterling Poses Risk to U.K. Recovery

The Bank of England issued a warning on Wednesday regarding the impact of the recent strong gains in the pound, suggesting that it could hinder Britain’s economic recovery.

The minutes from the bank’s December meeting indicated that sterling’s 2% increase in value over the previous month was a reflection of an improved economic outlook. However, the bank cautioned that continued significant appreciation of the currency could threaten export growth.

The minutes stated, “Any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery.” The central bank emphasized that a sustainable economic recovery in the U.K. would require a greater emphasis on export growth and business investment rather than relying primarily on consumer spending.

The report added that a rise in business spending would likely be crucial for maintaining the recovery in the long run.

Additionally, the stronger pound has contributed to bringing inflation closer to the bank’s target of 2%. Recent data revealed that the annual inflation rate in the U.K. dropped to a four-year low of 2.1% in November, down from 2.2% the previous month.

The Monetary Policy Committee unanimously decided to maintain interest rates at 0.5% and keep the central bank’s asset purchase program unchanged at GBP375 billion this month.