UK Inflation Falls to 0%

Market Trends - 24/03/2015

Bank of England Governor Mark Carney’s fears were certainly justified as evidenced by today’s inflation data. With UK CPI falling to 0.00% on an annualized basis, patience when it comes to interest rate policy will be relevant as the UK grapples with conflicting outlooks. On one hand, GDP growth is the highest in seven years and wage growth is exceeding inflation which is a strong indicator of further room to improve. Other positive signs include unemployment trending near the lowest level in over six years, stable at 5.70%, and a trade deficit that has shrunk to the lowest level in eighteen months. However, the prospect of importing deflation from the Euro Area might weigh heavily on the outlook as threats of slower growth manifest in the real economy. The kneejerk reaction in GBPUSD was downwards, with the pair quickly recovering from losses before resuming the trend lower. The recent strength in the Pound comes on back of a weaker dollar as the US outlook faces heightened hazards as it tries to navigate towards higher interest rates. However, with the Bank of England not yet hinting towards a timeline for higher rates, it will likely follow the lead of the Federal Reserve.

While Mark Carney took some criticism for his unwillingness to raise rates sooner, his prudence certainly paid off as economic data dictates that monetary policy will have to remain accommodative until inflation improves. Although an inflation resurgence is not forecast in the near-term, expectations are for measures to begin rising towards the end of the year, paving the way for the Bank of England to contemplate a higher interest rate environment. ECB President Mario Draghi is betting on a recovery in inflation as a cornerstone of his own policies, but these forecasts of revival are much more optimistic than realistic. Aside from Draghi’s anticipation, trying to raise interest rates on the backdrop of global recession might be damaging to economies desperate to find avenues for growth. Hawkish policy will hinge on inflation and while the month over month figures improved from -0.90% to 0.30%, a more pronounced rebound will be required before Carney and the Monetary Policy Committee take the steps to guide on a potential rate hike.


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