Today’s inflation figure shocked the market, and has further dampened expectations that the Bank of England may need to raise rates sooner than outlined in forward guidance. CPI came in at 2.2%y/y, the lowest level since September 2012, with the deceleration attributable to lower transport costs and education costs. The pound took a beating post release with GBPUSD dropping to 1.5850 and GBPEUR dipping below 1.1850.
The central bank will publish their updated economic forecasts tomorrow, and in the light of today’s inflation reading, we could see inflation projections revised downwards. In forward guidance, the BoE committed to keeping rates low at least until unemployment was below the 7% threshold, despite above target inflation. With price pressures easing, and the economy improving, there no immediate need to raise rates, and the central bank now has more room to keep policy loose in order to continue to support the recovery.
The market had previously questioned whether the BoE will be able to keep rates low, but with inflation now at 2.2%y/y, pressure on the central bank has eased. What needs to be highlighted is that once energy prices take effect, the decline in the inflation rate is likely to be reversed and the road to achieving price stability will be more difficult.
Sasha Nugent
Currency Analyst
