Bank of England Frets Over Inflation

Market Trends - 14/01/2016

Amongst advanced economies, inflation remains the elusive missing piece of the puzzle for a stronger, more sustainable recovery in GDP growth and unemployment.  As evidenced by today’s rate decision from the Bank of England, risks to the inflation outlook remain sizable, with the Central Bank not forecasting a return to the targeted 2.00% until 2017.  The super Thursday release was replete with the interest rate decision, MPC vote, and Meeting Minutes all largely matching expectations.  According to the most recent statistics, headline inflation rose at a 0.10% annualized rate through the month of November, a far cry from desirable levels that would enable the Bank of England to begin considering implementing higher interest rates in the UK economy as soon as May.  However, raising rates at this juncture threatens the economy with a deflationary trap that could invariably send rates back to the downside if the Bank of England if tightening policy proves too much to handle.


With energy prices still sliding and other indicators of economic strength continuing to sour amid results such as manufacturing and industrial production, external factors might tie the hands of Bank of England policymakers through the end of the year.  Although inflation might not experience the precarious drop of 2015, there still is some room for the measure to slide further, in-line with food and energy prices which continue to drag on CPI readings.  Core inflation is not much prettier, with many of the factors contributing to gains from the prior year likely to be absent in 2016.  Upward wage pressures have been reduced and although private consumer confidence remains healthy, business confidence continues to deteriorate, mirroring the developments abroad in key emerging markets.  With growth trending below pre-crisis levels and GDP expansion anticipated to remain restrained through the end of 2016, the kneejerk reaction higher in the Pound might be short-lived as the UK currency pushes towards a retest of 2009 lows.

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