Sterling slides as US ramps up inflation fight

The pound slumped to its lowest level against the dollar since the pandemic hit as traders braced for an aggressive interest-rate hike in the US.

Sterling was hovering around just $1.20 last night – plumbing depths not seen since March 2020 – ahead of the Federal Reserve’s latest decision on rates today.

Expectations are rising that the Fed could push ahead with a 0.75 percentage-point increase – a move not seen since 1994 and much bigger than the usual 0.25 percentage-point hike.

Pound slumps: Sterling was hovering around just $1.20 last night – plumbing depths not seen since March 2020 – ahead of the Federal Reserve’s latest decision on rates today

This has pushed the dollar higher as investors look to keep their money in a currency yielding greater returns.

But it will be unwelcome for British holidaymakers booking a summer getaway, as their pounds will buy less overseas. Sterling was also down against the euro, at €1.151.

The currency’s slide is pushing up the value of goods for families, as importers find their pounds don’t stretch as far when buying items that are sold in other currencies.

Officials at the Fed are desperate to get a grip on rising inflation, after data on Friday showed the cost of living shot up by 8.6 per cent last month –the biggest increase for more than 40 years.

A hefty hike from the US central bank, lifting rates further from their current 0.75-1 per cent range, will pile pressure on the Bank of England to bump up its own base rate tomorrow.

Policymakers on Threadneedle Street have already lifted rates from their pandemic low of 0.1 per cent in December to 1 per cent as they too grapple with sky-high inflation. 

Hiking rates theoretically keeps a lid on prices, as it encourages households to save rather than spend.

But it also puts a damper on economic activity.

The Bank of England now faces a headache as it tries to balance supporting growth with controlling inflation –especially after data this week showed the economy shrank again in April, and unemployment started to tick up again.

Economists are divided over whether the Bank will opt for the usual 0.25 percentage-point hike, or a higher 0.5 percentage-point jump.

Paul Dales, chief UK economist at Capital Economics, said weaker growth and slightly higher unemployment ‘may tilt the decision towards a 0.25 percentage-point rather than 0.5 percentage-point hike’. 

But he added: ‘That said, the possibility of a 0.75 percentage-point hike from the Fed, and the latest weakening in the pound, is pushing in the other direction.’

Worries about inflation and how rising prices and interest rates will hurt businesses have wreaked havoc with global stock markets in recent days.

America’s S&P 500 index is in so-called ‘bear market’ territory, slipping another 0.4 per cent after shedding 3.9 per cent on Monday. 

The FTSE 100 fell 0.3pc yesterday and is down 3.8 per cent since the end of last week.

This post first appeared on Dailymail.co.uk