Bad news for those working on the Isles, but…

Feb 13, 2018 3:12 PM|Bartosz Grejner

“Prices in the UK are increasing faster than salaries. But foreigners working in the UK may look for consolation in the hope that the pound will grow,” writes Bartosz Grejner, Conotoxia Analyst.

Bartosz Grejner, Analityk

The results of the Brexit vote pushed the pound by as much as 1 PLN below the level before the referendum. Nonetheless, the British currency may now make up for some of the losses. The central bank in the United Kingdom, unlike the Polish one, expects interest rates to rise, which should support the pound. Banker expectations are accompanied by price increases. For the fifth consecutive month, their growth has not decreased below 3%.

The inflation report published last week by the Bank of England may assume that interest rates will increase quite quickly and significantly. The bank pointed to inflation, which in the coming months will remain well above the level specified at 2%.

Basically, wages are decreasing

The Monday data on consumer inflation in January fits this report perfectly. For the fifth month in a row it amounted to 3%. If we look at its components, compared to previous years (2015-2016), the energy and fuel prices in the United Kingdom have increased significantly, and the costs related to property renting and maintenance have been clearly increasing more slowly. The mentioned increase in energy and fuel prices were mainly a result of higher oil prices.

Even if we take away the impact of the most volatile energy and food prices (including fuels), inflation amounted to 2.7% compared to January last year, it is still more than the average salary in the previous months. This means that in real terms, those working in the UK have been making less and less money.

Will they leave the EU with the worst growth?

The chance of accelerating interest rate increases, as there is also a growing risk of inflation slipping out of control. On the other hand, however, there is a risk of too rapid rate hikes in the economy as a too high interest level could harm UK growth. This, in turn, is relatively weak when compared with other countries.

The European Commission’s forecasts predict that during both this and next year the British economy will probably be the slowest developing economy in the whole of the EU. The main reason for this state of affairs can be seen in the Brexit process. Although the situation could be much worse. However, the economic recovery in the European Union, from which the United Kingdom wants to be disconnected, also supports its development to a significant extent. Without these favorable conditions, we could even be faced with the risk of stagflation, that is a lack of economic growth and, at the same time, high inflation, which would be even more important for salaries in the UK.

Poles will be happy, when they convert pounds into zloty…

While we still see economic recovery in both the EU and globally, the likelihood of faster interest rate raises in the UK remains relatively high. This is good news for the pound, which in the context of higher inflation and speculation about tightening monetary policy, may start an upward trend, at the same time compensating the loss suffered since the referendum. It also means that the salaries of Poles in the UK, when converted into zloty, finally have a chance to increase.

Feb 13, 2018 3:12 PM|Bartosz Grejner

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