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Surprisingly Low UK Inflation

James Boston
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The Bank of England (BoE) has just published it’s latest inflation figure, the headline rate is 1.6%. The Core Consumer Price Index (YoY for January) was anticipated at 1.9%, up from the previous level of 1.7%. Today’s level of 1.6% will no doubt create some pressure for the Bank of England.

UK inflation remains below the Bank of England target levels and this is putting pressure on the Monetary Policy Committee to begin tightening interest rates. This has been particularly pertinent since the surprise fall in the unemployment rate in December.

BoE Governor, Mark Carney, had previously stated that once unemployment fell below 7% monetary tightening would be on the agenda, so long as inflation and other factors remained within target parameters. Carney has recently been backing off this statement as the Bank appears more and more reluctant to raise interest rates while other global central banks continue to maintain their loose monetary stance.

In response to recovering core GDP, Sterling attempted a topside breakout yesterday, although a new 4 year high of 1.6818 was achieved it proved unsustainable in light of the impending inflation figure. In anticipation of this mornings CPI release GBPUSD dropped back to the low 1.67s where it remained until support gave way early this morning. Coming into these figures Cable had been trading sideways around the 1.6685 level but took an immediate dive on the publication of the surprise CPI number. This unexpected weakness in the previously recovering British economy has prompted a strong sell off, however some support is being found at in the mid to low 1.66s where there a raft of buy orders. This is a buying opportunity for this currency pair as despite the muted inflation data there is still a lot of bullishness on the British economy.

The Bank of England minutes due tomorrow provide the next significant information for sterling and more importantly the Monetary Policy Committees thought process, and clues as to how this may have to change in light of these week figures.

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