Weak data on inflation may prevent the Bank of England to raise interest rates

  • And
  • +A

In the UK, statistics released by the consumer price index for February, which turned out worse than expectations. In February, the consumer price index rose at an annual rate of only 2.7%, although the market had expected growth of 2.8%. However, in January inflation in the United Kingdom grew by 3% year on year, so in February, the price growth slowed down. In comparison with January consumer prices in February rose 0.4%, while the market was waiting for 0.5% growth.
Is it good or bad to the exchange rate of the pound sterling? The higher the inflation, the greater the likelihood of interest rate rises and tightening of monetary policy by the Bank of England, which has long expected by the market. Recall that in the UK the target level of inflation is considered to be 2% per year. Data today showed that annual inflation in the UK, although higher than the target level, but for the first time since the fall of 2017 fell below 3%.
If it was a temporary recession, and inflation in the following months will start to grow again, the financial regulator will be grounds to take the inflation under control by raising interest rates. So today’s data is seen as mild negative for the British pound. The probability of a rate hike in the UK next Thursday seems to be low. However, if inflation in the coming months will grow by more than 3%, it stimulates the Bank of England to raise interest rates earlier than the end of 2018.
GBP/USD on the announcement of statistics, inflation in the UK remains almost unchanged in price, while EUR/GBP falling by 0.22%. The focus of the market are on the Bank of England meeting on interest rate, which will be held on Thursday, where with very high probability will decide to leave interest rates at 0.5%.
Natalia Milchakova,
The Deputy Director of analytical Department,