Central banks' next moves will have consequences for sterling

The Bank of England (BoE) may have produced almost 100 pages of forecasts last week, but there is still very little that it can say for certain. This makes predicting its future decisions a lot harder – and each passing day could provide evidence both in favour or against rising rates once more. UK investors effectively need to work out how effective the central bank has been before knowing what happens to sterling, and what they should do next.

Policymakers noted that there were “considerable uncertainties” around how quickly inflation might fall – and how far higher interest rates have filtered through to the economy. BoE rate-setter Silvana Tenreyro recently compared the BoE to “the fool in the shower”, borrowing a metaphor attributed to economist Milton Friedman. The idea is familiar: a weary traveller visits a new hotel, and finds the water in the shower too cold. He turns up the hot water, but it takes a while to arrive. In frustration, the fool turns the hot water up to the maximum, with unpleasant results: “Eventually, because he's impatient, he gets burned.”