UK Inflation Rises, But Not Enough for BoE

Daily Analysis - 17/02/2016

Annualized Inflation Rises But Remains Far From BoE’s Target


The UK’s headline consumer price index accelerated slightly on an annual basis, reaching the highest value since January 2015. The value reported by the Office for National Statistics is nevertheless distant from the Bank of England’s goal of 2.00%, prompting policymakers to keep interest rates at record lows while also trimming forecasts for future growth and inflation.

UK Inflation At 12-Month High

The latest consumer price index reported for the UK saw the measure climb to 0.30% on an annualized basis, matching levels last seen in January. The value printed in line with expectations and exceeded December’s 0.20% rise. The increased was attributed to a sustained rise in housing and utilities costs whereas declines were reported in food, recreation and culture. However, the disappointments came from the monthly value which contracted by -0.80% during January, well below the previous month’s 0.10% reading and missing estimates of -0.70%, led by a vast -35.80% nosedive in airfare prices. Core annual inflation, which strips out the volatile food and energy components, slowed to 1.20% in January from December’s 1.40%. The Bank of England opted unanimously at the beginning of February to hold monetary policy untouched with rates at 0.50% as the inflation target of 2.00% remains far from reach.


ZEW Economic Sentiment Falls

Germany’s ZEW Economic Sentiment survey for the country fell to the lowest level since October 2014 amid a deteriorating outlook. The survey reported a value of 1.0 for February, with any figure above 0.0 implying optimism, but falling far from January’s 10.2 and missing estimates of 3.2. The survey reflected worsening sentiment as recent global turmoil has roiled financial markets while colossal declines in China’s economy is impacting the German export economy. Oil prices continue to sway close to record lows, keeping inflation targets for major economies beyond reach the reach of policymakers who are forced to keep policy accommodative. Euro Area ZEW Economic Sentiment also declined from January’s 22.7 to 13.6 for February while exceeding expectations of 10.3. The slowdown in the global economy continues to worry European Central Bank officials, with policymakers hinting that expanded measures will be introduced as soon as March.


New York Manufacturing Records Another Decline

The New York Empire State Manufacturing Index released by the Federal Reserve Bank of New York reported shrinking factory activity across the state. This marks the seventh consecutive decline in the figure after February reportedly fell by -16.64 after decreasing to -19.37 in January while also missing expectations of -10.00. Although the report highlighted a slight rise in input prices, selling prices experienced a small drop, leading new orders to show slight improvement despite remaining in contractionary territory. Employment stabilized according to the report, however working hours declined, highlighting the ongoing weakness in manufacturing employment. Factories are still hurting as the strength of the US dollar remains resilient while demand in the global economy is slowing, keeping the country’s exports expensive while at the same time reducing overseas profits. After the announcement, the US dollar gave back some of its gains versus the Euro, with EURUSD climbing to 1.1176.


Canadian Monthly Manufacturing Sales Rise

Canadian manufacturing sales climbed by 1.20% in December, the second consecutive monthly rise, after having risen by a revised 1.20% in the month prior. Statistics Canada reported increasing motor vehicle and wood products sales with the highest gains, accounting for over 30% of the increase, coming from chemical products, transportation equipment alongside ship and boat construction. All seven major Canadian provinces reported gains with the largest uptick taking place in Ontario. The whole year of 2015 saw its first annualized decline since 2009, printing at -1.50% with commodities such as petroleum and coal being responsible for the majority of the manufacturing contraction. Low oil prices and a weak Canadian dollar have seen the Bank of Canada hold rates at low levels with statements alluding to additional action to come if turbulence in the global economy persists.


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