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UK inflation eases to 12 year lows at 1%

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UK inflation eases to 12 year lows at 1%

Consumer prices in the UK declined to historic lows as data released by the ONS earlier today showing the headline CPI y/y coming below estimates at 1%, well below the estimates of 1.2%. Core CPI y/y also declined to 1.2%, below 1.5% estimates led by falling gas prices in the country. The lower inflation reading comes in line with the BoE’s estimates released few months ago during its inflation hearing report, noting that consumer price index was likely to remain subdued for the medium term and could possibly ease even lower below the current 1% reading.

  • Core CPI y/y 1.2% vs. 1.5% estimates
  • CPI y/y 1% vs. 1.2% estimates
  • CPI m/m -0.3% vs. 0% estimates
  • PPI input m/m -1% vs. -1.5% estimates
  • PPI output m/m 0.2% vs. 0.3% estimates

united-kingdom-core-inflation-rate

The lower than expected inflation reading is however unlikely to put a dent to the BoE’s plans of rising interest rates as the Central Bank Governor, Mark Carney, in a interview with a newspaper commented that interest rate hikes would start regardless of the downward pressure on inflation based on the fact that real wage growth has managed to pick up in the region. Carney however refrained from hinting on the time line as to when the interest rate hike will start, with current expectations being anytime starting spring next year.

The BoE had a mandate to maintain inflation near 2% level, which seemed possible during the first half of the year only to gradually decline ever since. The BoE monetary policy has consistently seen two dissenters with one of them, Ian McCafferty being the most vocal in his recent comments calling for the BoE to start raising interest rates sooner than having to take a ‘wait and watch’ approach. The BoE will be releasing its vote count tomorrow and is expected to maintain its status quo of 7-2 votes with 2 in favor of rate hikes.

The Cable saw a bit of volatility but remains largely positioned to the upside with the price, at the time of writing near 1.568 levels after dipping to an intraday low to 1.56. The Cable has been stuck in a tight range between 1.572 and 1.557 for the past month ahead of the FOMC statement due to be released tomorrow with the market highly positioned to see a hawkish outlook from the Federal Reserve, which should see further declines in the Cable on break of the lower end of the trading range at 1.557.

Trading into the next year, the Cable is most likely to be driven by interest rate speculation once the markets get more clarity at least from the Federal Reserve on the interest rate hike timetable. However, with the end of the year fast approaching, profit taking in the Greenback could provide a temporary lift to the Cable for the short term.

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