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Dollar drops under half british pound { March 2007 } Original Source Link: (May no longer be active)
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AP
British Pound Breaks Through $2
Tuesday April 17, 9:54 am ET
By Jane Wardell, AP Business Writer
British Pound Breaks Through $2 for 1st Time in Nearly 15 Years on Surge in Inflation
LONDON (AP) -- The British pound broke through the $2 mark on Tuesday for the first time in nearly 15 years after new data showed an unexpected surge in inflation, prompting speculation of interest rate increases.
Because of the pound's appreciation over the past few months, a Big Mac sandwich at a McDonald's restaurant in London now costs the equivalent of about $4, and a pint of beer at a local pub costs more than $5.
The pound was at its highest level since "Black Wednesday" in September 1992, when Britain crashed out of the European Exchange Rate Mechanism.
After initially retreating back below the psychological $2 mark, the currency spiked again to $2.0071 as the dollar retreated following the release of U.S. inflation data showing the core prices rose less than expected last month.
In afternoon European trading, the pound was at $2.0064 -- up from $1.9900 late Monday in New York.
"We believe that sterling could well remain above $2 for an extended period," said Howard Archer, chief economist at Global Insight.
The government's Office for National Statistics revealed Tuesday that consumer price inflation accelerated to 3.1 percent in March, up from 2.8 percent in February.
The headline rate of retail price inflation, which includes mortgage interest payments, rose to 4.8 percent from 4.6 percent.
The rising CPI rate, well above the Bank of England's target of 2 percent, adds pressure for a further rise in official interest rates, which are currently at 5.25 percent.
The bank has raised the base rate by three-quarters of a point since August and economists had been predicting one more rise in the coming months to close off the current cycle of increases -- but the data has prompted speculation about more than one hike.
In a letter triggered by the soaring inflation rate, Bank of England Governor Mervyn King said that policy-makers "must ensure" price expectations will be "anchored."
"The Monetary policy Committee remains determined to set interest rates at the level required to bring inflation back to the 2 percent target," King said in an open letter of explanation to Treasury Chief Gordon Brown, which is required if the inflation rate runs more than 1 percent above or 2 percent below the target. It is the first time King has written such a letter.
Investec Securities chief economist Philip Shaw said the inflation figures made an interest rate increase "a certainty, along with the possibility of another rate rise beyond that."
However, he added that the bank was unlikely to have a "knee-jerk" reaction and raise rates at their May meeting, which is just two weeks away.
Jonathan Said, senior economist at the Center for Economics and Business Research, said the data "opens the possibility of rates rising beyond 5.5 percent after May toward the 6 percent level."
King said the rise in inflation partly reflected an "unexpectedly sharp" increase in domestic energy prices during the second half of last year and a rise in food prices caused by a weather-induced global reduction in supply. Inflation was also supported by increased spending and business confidence, he said.
Tourism operators said there may be an increase in bookings to the United States, with shopping breaks in New York proving popular last time the pound flirted with the $2 level in November.
Conversely, Britain will become more expensive for U.S. tourists, but economists point out that the euro is also weak against the dollar and local travel agencies do not expect to see a large drop in visitors given the currency has been hovering near $2 for several months.
The pound reached its highest levels since before Britain was forced to leave the system that pegged the pound to the currencies of other EU members after currency speculators drove it out of its allowed range.
Then-Prime Minister John Major raised interest rates twice on Sept. 16, 1992, and authorized the spending of billions of pounds in a doomed attempt to stop the currency from crashing out of the exchange rate mechanism, on a day the current Treasury Chief Gordon Brown described as "Black Wednesday."
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