Tuesday, April 17, 2007

17 April 2007: Cable

Yup, there it is - the magic two-dollar pound. It initially happened about 9.30 this morning, while I was at Mauro's getting the six-weekly mop chop. It happened again, for less than 30 seconds, at 10.20 (or 9.20 if you're Reuters), and rumour is that it'll be up there for good later on today. Why?

Mainly because UK annual inflation rose to 3.1% last month, which took a few people by surprise, not least the Governor of the Bank of England (one Mervyn King) who, for the moment, has to put his game of minesweeper aside in order to write a letter to the Government explaining why inflation is above 3%. (Answer: people are buying lots of stuff. I'd have thought it was pretty obvious.)

This has consequences beyond just the Governor's ability to play computer games. It means that people are spending lots, and the standard way to make people spend less and thus bring inflation down to the target figure of 2%, the Bank of England will raise interest rates to 5.5% in early May. Thus people with mortgages will have to pay more and so have less to spend on milk, petrol and furniture (apparently those three are the main causes of the latest inflation hike), thus demand drops in comparison to supply, and the pressure for prices to rise is lowered. And so inflation drops. And that's that and everyone's happy. Except for homeowners, of course. And a few other groups...

The thing about high interest rates is that it makes Sterling a rather attractive proposition for foreign investors. Nice high returns on investment mean that people are, this morning, selling their dollars and buying pounds instead, thus pushing up the pound-dollar rate (nicknamed 'cable' for some reason I can't fathom) to the $2 mark and beyond. Weak inflation data is expected from the US later today, especially from their housing sector, and that's expected to take the rate firmly beyond the $2.00 mark by close of play.

And while the $2 pound is good for us personally (Gloria this morning said "shame we didn't wait another week to do our latest transfer") it's bad for UK industry: nobody from another country really wants to buy from the UK when, effectively, our pound-priced products are just getting more and more expensive in their own currency. And it's a bummer for the tourist industry too: US visitors are much less likely to come when they don't get a lot of pound for their dollar, especially when you consider how expensive London already is as a destination. At least if they're not buying milk, petrol and furniture it might help inflation go back down.

So there it is, a landmark for my Dollars java program but very mixed news for the UK economy. Of course in really important news, a haircut at Mauro's still costs £8 but in the second major shock news story of the day, Mauro exclusively revealed to our reporter that his shop will cease to be as of next March: the fourteen-year contract is up and he's going to get a little van and do mobile haircutting instead.

Now why aren't the BBC carrying that as their top story?

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