Britain’s Consumer Price Index came out yesterday morning with the news that inflation is indeed at 4% - confirmation that inflation is now double the Bank of England’s target rate of 2%.
Having received the news that inflation had hit a 2 year high, and with traders anticipating a near-term interest rate hike, the pound duly rallied across the board.
Today was however a different matter. In a press conference this morning to discuss the recent inflation data, King was typically downbeat on the prospect of raising rates, cooling market expectation with his dovish tone. He alluded to the idea that the Bank may well keep interest rates at a record low to aid the recovery which is “unlikely to be smooth”. He followed this up with clarification that policy makers haven’t actually preannounced an interest-rate increase, suggesting that the market may have “run ahead of themselves”.
The bank today forecast that inflation will quicken from a 2 year high and peak at 4.4% before easing to its 2% target in mid 2012. This came amongst downgrades on its growth forecast.
On this news, an already twitchy market saw the pound fall against all of its major counterparts.
Some in the market then will reconsider whether UK rates will rise as early as mid-year. We will see a fuller picture when the bank releases the minutes from its recent inflation report meeting next week. The MPC members have a tough job in balancing higher inflation with weak economic growth, with King rightly acknowledging that “if you don’t see differences of view in this kind of situation, when ever would you find them?” What is certain, is that the BoE will have to raise interest rates at some point, the market will now however have to reassess when they will pull the trigger with King giving no hints away on timing.
Edward Knox
Analyst - Caxton FX