UK Inflation Doesn’t Budge: GBP doesn’t Like That!
The CPI rate in the UK has displayed a rising tendency since the June 23, 2016 Brexit referendum. Consider that in September 2017, the inflation rate had spiked to 3%. However, for the year to date, ending in October 2017 the inflation rate broke with its increasing trend. This puts paid to the notion that the Bank of England (BOE) will swiftly be moving to hike the bank rate anytime soon since it’s 25-basis point rate hike on Thursday, 2 November 2017.
As a result, the GBP/USD pair – The Cable – was trading was trading at 1.3091, for a 0.18% downward revision post announcement. That sterling is holding steady above the critical 1.30 support level against the greenback is notable, and further gains are expected as a UK economic recovery slowly starts to get underway.
Currency traders were less forthcoming in their actions. They shorted the GBP en masse, owing to the diminished prospect of additional rate hikes in the near future. The BOE’s Monetary Policy Committee (MPC) voted in a surprise 7-2 majority to raise the bank rate by 25-basis points to 0.50% earlier in the month, but expectations have cooled since then.
ONS Weighs in with CPI Data
According to the latest data by the ONS (Office for National Statistics) for the year through October, the CPI rose 3%, equivalent to the September rate of growth in the CPI. However, BOE governor Mark Carney believes that inflation will continue rising and this will necessitate a series of gradual bank rate hikes over time. The current inflation rate in the UK is at a 5-year high. According to City of London financial analysts, a projection of a 3.1% was made, and that would have prompted a missive from the Governor of the Bank of England to the Chancellor of the Exchequer explaining why inflation is so much higher than the 2% objective.
The UK’s core inflation rate in October was equivalent to the core inflation rate in September at 2.7%. The BOE’s determination to stamp out runaway inflation was precisely the reason why it tightened monetary policy by raising interest rates. By reducing the money supply, the BOE is hoping to reduce rampant borrowing, and drop inflationary pressures. The BOE is sticking to its guns: inflation will top 3% by the end of 2017. Bullish traders fully expect at least 2 additional rate hikes before 2020. That should put the UK bank rate at around 1%.
Currency Traders Split on Which Way the BOE Should Go
The expectations of currency traders, analysts and stakeholders are marred by the current state of ongoing Brexit negotiations. Brexit secretary David Davis and his European Union counterpart, Michel Barnier are attempting to work out their differences as they try to reach common ground on a Brexit blueprint. Inflation is being driven by a weak GBP. Sterling depreciated from 1.48 to the greenback to its current level of 1.30, and this is fuelling higher import costs.
The FTSE 100 index has benefited from a weak GBP, largely thanks to revenues being determined outside of the UK and then being repatriated back home. According to the Office for National Statistics, food, recreation, and health costs have been rising. This has been offset to a degree by declines in transport costs and reduced furniture demand.
For some analysts, UK inflation is at its zenith. Tremendous whipsaw activity with the GBP has been driving inflationary pressures, but there is concern that domestic price pressures will soon become the driving force of UK inflation. Leading brokerages and financial experts may be divided in their opinions vis-à-vis UK CPI data, however there is the expectation that inflation will drop towards the 2% objective as set out by the Bank of England.
What do you think will happen with CPI data in the United Kingdom? Do you feel that the Bank of England should initiate a series of additional rate hikes towards the 1% objective? How will this impact household debt?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.