Unexpected Change in UK Inflation Drives GBP Lower
Consumer Price Inflation Figures (CPI) Bolster Bank of England confidence
On 18 July 2017, UK inflation figures for June were announced. Much to the delight of economists and analysts, CPI inflation figures declined from a previous reading of 2.9% in May to 2.6% in June. Analysts were anticipating an inflation rate of 2.7%. This marks the lowest rate of inflation in 3 months in the United Kingdom, reflecting slower price rises owing to cheaper oil and a slowdown in price growth for goods and services.
The annual core inflation rate dropped to 2.4% for the month, beneath market expectations of 2.6%. The next inflation reading will be announced on August 15, 2017 and analysts are forecasting a rate of 2.99%. The GBP was quick to react to this news, and it plunged against a basket of currencies, notably the USD, the EUR and the JPY. The latest readings on these currency pairs are as follows:
- The GBP/USD pair is trading at 1.3042, down 0.09% or $0.011
- The GBP/EUR pair is trading at 1.1282, down 0.79% or €0.009
- The GBP/JPY pair is trading at 146.12033, down 0.60714% or ¥0.89258
The GBP’s retreat typically bodes well for the all-share UK index, the FTSE 100. The index closed the day at 7390.22, down marginally (-0.19%) or 13.91 points. The index plunged, owing largely to the decline in Experian PLC share price. EXPN shed 2.05% by the end of the day, dragging the index lower. Earlier in the day, the all share index rallied on the back of a weak GBP which dropped beneath 1.31 to the greenback, but settled lower at 1.3042.
Bank of England Not Ready to Pull the Trigger
Recall that a weaker GBP is typically associated with greater earning potential for the FTSE 100 index. Since the earnings are generated outside of the UK, they are worth considerably more when the funds are repatriated back home. However, weakness in the inflation rate (from 2.9 percent to 2.6%) gives the Bank of England pause on monetary tightening. The BOE is more likely to act if it fears inflation is getting out of control, and will adopt quantitative tightening in the form of interest rate hikes to the bank rate to prevent the economy from overheating.
The Bank of England has forecast an inflation rate of 2% for the economy, but the current rates are significantly higher. The pound declined for several reasons, notably analysts were anticipating an inflation rate higher than 2.6%, and the Bank of England has pushed back its date for a rate hike. That would have made the GBP more valuable. The big concern for the UK economy is the exodus of multinational companies (banks, financial institutions, automobile manufacturers) from the country to European capitals. That the pound has depreciated significantly against other currencies is also driving CPI figures higher.
Rising import costs are fuelling greater expenditures for consumers. With the GBP having less purchasing power today than it did pre-Brexit, consumers are having to fork out considerably more for the same purchases. An economic contraction is taking place in the form of sticky wages and lower personal disposable incomes. Bank of England governor, Mark Carney prefers an accommodative outlook for the GBP and the economy to prevent an economic slowdown from taking root.
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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.