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A stronger currency and higher costs in the United States could result from the Bank of England raising interest rates more quickly.
According to a government report released on Wednesday, the cost of living in the United Kingdom increased by 10.1% in July. This is the first major economy to experience double-digit inflation since COVID-19, and it is another another indication that pricing pressures are escalating globally.
Because inflation has been a central thesis in the bitcoin (BTC) market for the past few years, the news might give economic talks among crypto specialists greater urgency.
According to John Silvia, the founder of Dynamic Economic Strategy and a former top economist for Wells Fargo, higher inflation in the U.K. might increase price pressures overseas, particularly in the U.S.
He said that "tis a tussle between expectations of Federal Reserve and Bank of England policy."
This year, the Bank of England has raised interest rates six times. The 50 basis point gain in August was the most since 1995. As the bank's own projections indicate that inflation will reach 13% later this year, the U.K. central bank may increase interest rates more quickly.
Faster rate increases by the BOE may boost interest in fixed-income securities in the U.K., which would therefore raise demand for the pound, boosting its value on foreign exchange markets.
The U.S. dollar will also likely be weaker in comparison, which might lead to American consumers paying more for imports overall and raising domestic inflation. Risky asset markets would undoubtedly experience pressure if the Fed was compelled to respond with more hefty rate hikes.
Bitcoin traders have been closely monitoring the dynamics of inflation since at least early 2020 since crypto assets are one of the riskiest asset classes.
As a result of its preprogrammed pace of issuance under the initial blockchain design, Bitcoin was viewed as a hedge against inflation. In reality, however, genuine reports of inflation have forced central banks to reduce or stop money creation and tighten monetary policy in order to prevent economies from overheating. As a result, the cost of risky assets such as stocks and cryptocurrencies has fallen.
The British pound gained value, according to Silvia, when the U.S. consumer price index reported a little decline. The pound may increase in value slightly as a result of the most recent U.K. inflation, particularly if the Federal Reserve only increases the funds rate by 50 basis points in September. (One basis point is 0.01 percentage point)
Currently, the UK has a 1.75% interest rate, but traders anticipate it will grow to over 2% by year's end and over 2.6% by the end of 2023.
The federal funds rate in the US is currently 2.25 percent, but markets have already begun pricing in further gradual rate increases in the coming months. Markets may receive additional clarification on that in the Federal Open Market Committee meeting minutes that will be released on Wednesday at 2 p.m. ET.
The new CPI shows evidence of a reduction in the rate of growing prices, and while inflation in the UK is still on the increase, the U.S. economy has received some relief. The issue is whether price hikes are indeed slowing down or if the most recent figure was just a brief respite. Another scenario is that prices will remain high at their current level.
According to Brian Coulton, chief economist at Fitch Ratings, "the rise in services inflation this year is a clear sign of inflation broadening and becoming self-reinforcing, and it’s been a pattern shared in both economies in the context of tight labor markets."
"This is arguably the segment of the CPI basket that the BOE has most control over, and it is way too high and still rising," he said. "The recent U.S. CPI print showed a similar pattern."
By fLEXI tEAM