Overview
Consumer prices in Great Britain advanced to an annualized 3.5% in January from 2.9% the previous month, which was largely in-line with expectations. The reading marks the fastest pace of growth since November 2008 as an increase in sales tax pushed inflation above the upper bound of 3%, and led Bank of England Governor Mervyn King to write a letter of explanation to Chancellor of the Exchequer Alistair Darling. However, Mr. King held a dovish outlook and said that the rise to 3.5% is merely a “temporary deviation,” while adding that the underlying price pressures are indeed “to the downside.”
Meanwhile, January retail prices in the region was unchanged from the month prior, while the annualized rate climbed 3.7%, the office for National Statistics in London announced today.
Market Reaction
Immediately following the headline reading for inflation, the EUR/GBP tumbled from 0.8711 to a low of 0.8697 ten minutes later, only to bounce back and then stumble again following the letter by Governor King released around 10:20 GMT.
Forecast
Looking ahead, investors are weighing in a zero percent chance that the Bank of England will raise borrowing costs at its next rate decision meeting on March 4th as the central bank maintains the option to expand its emergency program over the coming months. Last week, Governor King publicized that the central bank cannot control short-term price moves as the pound’s weakness and higher commodity prices fuel consumer prices. It is noteworthy that if inflation does not taper off during the second half of the year as King suggests, the central bank could be forced to tighten policy as the MPC aims to ensure price stability in the U.K.
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Written by Michael Wright, DailyFx Research
Questions? Comments? Email me at mwright@fxcm.com
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