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GBP/NZD Forecast: Will Higher UK Inflation Raise Odds of GBP-Boosting Interest Rate Hike?

Pound Sterling Currency Forecast

The Pound dropped against the New Zealand Dollar on Friday and could weaken further on future UK inflation figures.

Inflation is currently of high interest to Pound traders, following a series of remarks from Bank of England (BoE) officials.

At a BoE event on Thursday, reports showed that the central bank had forecast UK inflation to near 3% in 2017.

This outlook would usually boost Pound demand, as it would imply that the BoE would be more likely to raise interest rates. Problematically, however, BoE Governor Mark Carney later gave a press conference focusing on falling UK incomes.

The Governor was specifically discussing ‘real incomes’, which are calculated as basic income minus added costs from inflation. Carney blamed current poor wage growth on limited UK production activity, as well as company reluctance to raise wages during the current political climate. In the Governor’s words;

‘This is going to be a more challenging time for households’.

BoE forecasts of poor wages and rising inflation have concerned traders, especially after a statement from IHS Markit economist Howard Archer;

We maintain the view that the BoE is highly likely to keep interest rates at 0.25% through 2017 and 2018 and very possibly beyond. In fact, we do not see the BoE edging interest rates up until 2020 given likely prolonged economic and political uncertainties centred on Brexit’.

If the BoE does remain reluctant to touch UK interest rates in spite of rising inflation, the Pound could drop sharply on each successive interest rate freeze.

New Zealand Dollar demand may rise on future housing market news, especially if house prices cool.

A recent report from Urban Economics has revealed that the NZ property sector is the largest single industry in New Zealand, making housing market fluctuations more impactful.

There have been recent fears of a housing bubble developing over the NZ market, which threatens to cause high turbulence and could lead to home prices soaring.

If house prices are high to the point of unaffordability, then there could be less market activity which would lessen economic contributions from the sector.

Key market measures to watch out for will include construction activity, which can cover new house building, as well as more general house price indexes.

Recent Interbank GBP NZD Exchange Rates

At the time of writing, the Pound to New Zealand Dollar (GBP NZD) exchange rate was trading down at 1.8801 and the New Zealand Dollar to Pound (NZD GBP) exchange rate was trading up at 0.5317.