On Thursday morning, the UK’s central bank the Bank of England, via its MPC (monetary policy committee), will reveal its latest decision regarding interest rates. On Tuesday the UK’s official statistics body, the ONS, announced that the (CPI) annual inflation figure for the U.K. came in at 2.9%, missing the forecast. The monthly figure for August came in at 0.6%, rising from the -0.1% recorded for July. Both figures concerned analysts for two reasons.
Firstly; with the pound recovering ground versus the dollar during 2017, up from a low in January of circa 1.20, to a current 2017 high of 1.32 and the price of WTI oil falling since January, from $53 to $48 dollars per barrel, the expectation was that U.K. inflation may have peaked, despite the pound falling versus the euro.
Secondly; the E.U. is still the UK’s major trading partner, therefore (overall) the price of imports will likely increase, unless the pound recovers lost value versus the euro. If inflation is still racing ahead, despite cable and the price of oil falling, the future for Brexit looks ominous.
As news of the (CPI) inflation data was released sterling spiked versus the majority of its peers, investors and currency speculators believing that the MPC/BoE will (sooner rather than later) be forced to raise interest rates, to control inflation. However, the MPC will be announcing a decision on Thursday possibly already taken. Unless they had prior intelligence regarding the inflation data, then Tuesday’s CPI release is unlikely to sway opinion at this late stage. Moreover and with a touch of irony, speculators have (in some ways) done the MPC’s job for them; GBP/USD rose to its highest 2017 level on Tuesday, whilst EUR/GBP has fallen during the past three weeks, from a high of 93.00 to 90.00. This latest inflation figure may prove to be an outlier, if Sterling continues to strengthen versus its two main peers.
All things considered it would be a surprise if the BoE announce a rise from the current base rate of 0.25% on Thursday, although with Canada announcing a surprise rise last week, the ECB’s intention to announce a plan next month to reduce the asset purchase programme and with the USA Fed/FOMC committed to another rate rise before the end of 2017, the BoE may wish to get ahead of the central banks’ curve.
U.K. economic snapshot
• Inflation (CPI) 2.9%
• GDP (Q2) 0.2%
• Interest rate 0.25%
• Govt debt v GDP 89.3%
• Unemployment 4.4%
• Composite PMI 54
• Retail sales YoY 1.3%
