Why did the latest U.K. inflation reports crush the pound? Here are four things you should take note of:
1. Record-low inflation in the U.K.
For the month of October, the annual CPI reading slipped from 2.7% to 2.2%, sharper than the projected decline to 2.5%. This is also far below the BOE’s forecast of 2.8% average inflation for the rest of the year, as headline inflation has dipped to its 13-month low.
Components of the report show that the drop was spurred by lower transportation costs and petrol prices, along with seasonal factors related to university tuition fee programs. Removing these volatile elements still shows that core inflation is weaker than expected at 1.7% versus the estimated 2.0% reading.
2. Less pressure on BOE to hike rates
Perhaps the main reason why the pound sold off upon the release of the weaker than expected figures was that low inflation eases the pressure on the BOE to hike interest rates. Recall that the British central bank has previously struggled to keep inflation under control while stimulating economic growth at the same time.
Although annual inflation is still a few notches above the U.K. government’s 2% target, analysts believe that the slowdown in inflation paves the way for better economic performance. This means that the BOE can maintain its current pace of stimulus without worrying about price pressures.
3. More room to ease if necessary
In addition, the BOE now has the option to increase its bond purchases if necessary. Bear in mind that the U.K. economy has also seen its fair share of bleak figures, particularly in manufacturing, in the past few months. Should these translate to weaker growth prospects, the central bank might be less likely to hesitate from increasing stimulus or cutting rates.
4. Inflationary pressures to remain subdued
Furthermore, other medium-tier inflation figures reveal that price pressures could remain low in the near-term. In particular, the retail price index showed a lower than expected 2.6% reading while the producer price index printed a 0.6% decline.
With that, the central bank is expected to downgrade its inflation forecasts for the year and possibly the next couple of years, confirming that the BOE will be able to stick to its forward guidance of keeping interest rates unchanged for the foreseeable future. Do you think that’ll be the case? Let us know by voting through the poll below!