UK consumer inflation slows, eases pressure on BOE
Consumer inflation in the UK fell to its lowest level since September 2012, according to the Office for National Statistics. The Consumer Price Index rose at an annualized rate of 2.2 percent in October, compared to 2.7 percent the previous month. On a monthly basis, CPI rose 0.1 percent, compared to a 0.4 percent hike the previous month.
Consumer inflation moved closer to the Bank of England’s 2 percent target. Policymakers will continue to hold their benchmark lending rate at record lows so long as the inflation target remains 2 percent. The sharp drop in CPI gives the central bank more flexibility to maintain the pace of stimulus, which is currently set at £375 billion.
Britain’s Monetary Policy Committee will publish new growth forecasts Wednesday. The MPC will likely raise its expectations to account for unexpected growth in the domestic economy. Gross domestic product expanded 0.8 percent in the third quarter, according to official government estimates. The UK service economy grew at the fastest pace in more than 16 years in October, while the construction sector expanded at the fastest pace in six years. New home volumes rose 19 percent in the third quarter, with mortgage approvals reaching a 5 ½ year high in September.
“Low inflation should allow monetary policy to continue to support a strong economic recovery in 2014-15,” said Michael Saunders of Citigroup. According to Martin Beck of UK-based Capital Economics, “October’s inflation data suggests that the UK economy is hitting a sweet spot of accelerating growth and falling inflation.”
The unexpected drop in inflation will reduce pressure on the BOE as it strives to meet its target. Lower inflation expectations will build confidence in favour of interest rate hikes, a move that will support the British pound. However, the BOE has pledged to hold its lending rate at record lows until the unemployment rate reaches 7 percent. The central bank previously said it expects the unemployment rate to reach its target sometime in mid-2016.
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