Following the supply chain disruptions and economic contraction of 2020, the Bank of England (BoE) aggressively cut its Bank Rate to a historic low of 0.1% and expanded its asset purchase facility (quantitative easing) by an additional £450 billion. This unprecedented monetary expansion was intended to lower borrowing costs for households and businesses and support aggregate demand.
However, as the global economy reopened in 2021 and 2022, a combination of global energy price shocks and the sharp depreciation of the British Pound (Sterling) against major trading currencies, such as the US Dollar and the Euro, exacerbated price pressures. By late 2022, consumer price inflation in the UK peaked at over 11%, well above the BoE's 2% target. In response, the Monetary Policy Committee (MPC) embarked on a rapid tightening cycle, raising the Bank Rate to 3.5% by December 2022. Some analysts warn that structural trade barriers and a weak sterling may continue to feed into domestic inflation, complicating the path back to price stability.
Explain one reason why 'the sharp depreciation of the British Pound (Sterling)' (Extract B) is likely to increase domestic inflation in the United Kingdom.
