Ukraine crisis could send commodity prices soaring, warns Bank of England
The UK could be faced with a sharp rise in significant commodity prices and a rise in the value of the pound, if the political crisis in Ukraine remains unresolved, key Bank of England policymakers have identified.
The Monetary Policy Committee, who is tasked with shaping the nature of future activity of the Bank of England, worryingly outlined that any further escalation in the ongoing political battle in Ukraine between the West and Russia could impact international costs for grain and energy provisions adversely.
"The political situation in Ukraine was serious and the economy itself was fragile," minutes of the Bank's Monetary Policy Committee's March meeting said.
They argued that whilst the impact on the global market has thus far been ësurprisingly mutedí, that nevertheless there is a ìrisk that any further intensification of political tensions between Ukraine and Russia might cause a material increase in the international prices of grain and energy supplies."
Commodity prices have already been destabilised by rising demand from Asia, and the situation in Ukraine coupled with unusually radical weather will do little to quell the fears of market analysts, who are accurate in forecasting that the global market will suffer substantially unless measures are taken to bring an end to the problems in Ukraine at present.
Sterling on the rise
The MPC also identified that sterling had appreciated by 1.5% in the past two months, attributing the rise to the improvement in the countryís economy and a recent swarm in investors who have transferred their money out of the unstable areas of Russia and Ukraine and into Britain.
"It was possible that this gradual appreciation would continue if prospects in the United Kingdom continued to be seen as increasingly favourable relative to those of its main trading partners," the minutes said.
The MPCís minutes also reiterated the sentiment of Bank Governor Mark Carney, who previously brandished the nature of the UKís economic recovery as ëunsustainableí and unrepresentative as it has been based on a rise in consumer spending, promulgated by low interest rates, rather than more meaningful factors such as business performance, labour productivity and wage growth.
"There were initial signs that the anticipated broadening from household to business spending might have already begun. Even so, there remained some way to go to ensure that the recovery was both balance and sustainable," the minutes said.
It is widely believed that the MPC are split in opinion about the size of the UKís output gap, with some believing that it is currently quite small, and as such rates should be raised this year, whilst others believing it is substantially larger and have called for rates to be raised sometime next year.
Governor Mark Carney is thought to be part of the group who advocate raising rates next year rather than prematurely, due to the belief that the spare capacity in the economy is higher than the 1.5% GDP. However, key external policymaker Martin Weale is thought to believe that this figure is closer to 1%.
Some members have also pointed out that labour productivity has remained consistently low because the government has yet to address the huge problem area of youth unemployment, which has caused many other policymakers to underestimate the deficiencies in the nature of the current economic recovery.