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U.K. pound at highest level in nearly 15 years

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.
/ Source: The Associated Press

The last time the British pound was worth more than $2, the elder George Bush was waging a losing U.S. presidential campaign against Bill Clinton and the Eurotunnel linking Britain to Europe was still under construction.

It took almost 15 years for the pound to again touch $2, the level it breached Tuesday after figures showing an unexpected surge in inflation led economists to conclude that multiple interest-rate increases were likely. The prospect of higher rates can boost a currency by promising bigger returns on certain investments denominated in it.

While the currency has been flirting with the $2 level for several months, hitting it marks a key psychological notch in trading that analysts expect to hold.

The pound reached a high of $2.0074 before dropping back to $2.0066 in late New York trading, up from $1.9900 late Monday. The last time the currency traded above $2 — on Sept. 16, 1992 — marked the end of Britain’s membership of the European Exchange Rate mechanism, which pegged the pound to the currencies of other EU members.

“We believe that sterling could well remain above $2 for an extended period,” said Howard Archer, chief economist at Global Insight.

Tourism operators expect the new round figure to jog interest in bookings to the United States, with shopping breaks in New York proving popular last time the pound threatened $2 in November.

Conversely, Britain will become more expensive for U.S. tourists — but economists noted that the euro is also strong against the dollar and local travel agencies do not expect to see a large drop in visitors given that the currency has been hovering near $2 for several months.

Prime Minister Tony Blair was sanguine about the pound’s new level, pointing out that it both makes exports more expensive on international markets and helps keep a lid on inflation.

“Obviously it causes difficulties for manufacturers and exports, and on the other hand it also provides a countervailing pressure on inflation ... but that is something ... the market will decide,” Blair told reporters at his monthly news conference.

It was inflation that pushed the pound through $2 on Tuesday.

The currency spiked after the government’s Office for National Statistics revealed that consumer price inflation accelerated to 3.1 percent in March, up from 2.8 percent in February.

More than 1 percent above the government’s 2 percent target, the increase triggered the requirement that Bank of England Governor Mervyn King write a letter of explanation to Treasury Chief Gordon Brown for the first time since the bank was given its independence in May 1997.

King said in the letter that the faster inflation reflected an “unexpectedly sharp” increase in domestic energy prices during the second half of last year and higher food prices, caused by a weather-induced global reduction in supply. Inflation was also supported by increased spending and business confidence, he said.

Britain’s economy has been expanding despite three interest-rate increases since August and Brown, who took over the financial reins when the Labor Party came to power in 1997, has been lauded for producing a record growth cycle.

However, it now costs around 92 pence ($1.84) for a liter of unleaded petrol, compared with 46 pence when the currency was last at $2 in 1992, an average 2.56 pounds ($5.14) for a pint of lager, compared with 1.48 pounds and 85 pence ($1.71) for a loaf of sliced white bread, compared with 54 pence.

King said the bank “remains determined to set interest rates at the level required to bring inflation back to the 2 percent target.” Economists had been predicting one more rise in the coming months from 5.25 percent to close off the current cycle of increases, but most are now leaning toward two more.

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 its May meeting, which is just two weeks away.

Jonathan Said, senior economist at the Centre for Economics and Business Research, said the data “opens the possibility of rates rising beyond 5.5 percent after May towards the 6 percent level.”