Last month inflation in the UK fell to its lowest level since November 2010, in line with Bank of England forecasts for a sharp decline this year.
The Office for National Statistics said that consumer price inflation fell to 3.6 percent in January from 4.2 percent in December, extending the marked drop in inflation from September’s three-year peak of 5.2 percent.
The news will come as some relief to Mervyn King, govenor of the Bank of England as he prepares to report the quarterly inflation report tomorrow. He will however still need to write a letter to the Chancellor explaining why inflation is above the 2 percent target. Experts still predict the Bank will keep to its forecast for inflation to drop below the 2 percent target by the end of the year.
The drop in inflation was part of the reason the Bank decided to press ahead with further QE. The normal tool for controlling inflation is interest rates, so to cut inflation, rates would need to go up. This isnt an option at the moment with the slow economic growth so if inflation keeps falling it will open the door to more QE later this year. If the fall in inflation stalls, the Bank may need to reconsider further bouts of asset purchase which would be negative for the economy and as such the pound.
The pound gained against the Euro this morning following the release of Trade Balance and Industrial and Manufacturing Production data. All the figures came in better than forecast giving a welcome boost to the pound before the QE decision at lunchtime.
Trade balance, although negative was not as bad as expected coming in at -£7.11 Billion compared to -£8 Billion. Industrial production for last month was up 0.5% compared to expected 0.2% and in the Manufacturing sector we saw a 1% increase compared to 0.2% forecast.
Now we wait for midday and the Bank of England’s announcement on QE… will we see the expected £50 Billion in-putted or as speculated yesterday afternoon in trading an extra £75 Billion?
If we have the expected £50 billion, I would expect there to be little change to the pound euro exchange rates. An increase by £75 Billion could leave sterling open for more selling and we could see the rates come down further.
In Europe, the Greeks are still waiting for pen to be put to paper to sign off their austerity measures to secure the bailout required for repayment of loans next month. The ECB will hold a press conference this afternoon so we could hear of plans to help sure up the failing Greek economy and further plans as a whole for how the central bank plans to move forward. Posistive murmurs are likely to help the flagging single currency so watch out this afternoon from 1.30pm to see which way the rates go.
Keep in touch with one of the traders at Currency Index for more insight and live market quotes or contact me directly at email@example.com to discuss your upcoming requirements and how the current issues may affect your currency purchase
Today saw the release of worse-than-expected gross domestic product data showing the UK economy contracted by 0.2 percent in the final quarter of 2011 and signs that the Bank of England is preparing for another round of quantitative easing.
Despite this the pound recouped losses against the euro, after falling to within sight of a near four-week low in early London trade as market players positioned for a weak GDP number. Concerns about the European Central Bank having to write down its Greek bond holdings as part of a deal to avoid a disorderly default also weighed on the single currency.
Bank of England minutes from the last policy meeting, released at the same time, showed members voted unanimously to keep total asset purchases at 275 billion pounds, although the minutes also said a further expansion of asset purchasing was “likely” to be required.
Market players said sterling was oversold against the euro on some concerns of an even weaker GDP number. The fact that no BoE policymakers voted for an increase in QE this month – even though it is strongly expected in February – also lent some short-term support to the pound.
“There were a couple of calls of minus 0.7 percent from a couple of forecasters which maybe spooked people. There was definitely some chat of weaker numbers ahead (of the data) so I think that’s why we’ve seen a bit of a bounce, combined with the minutes not guaranteeing any extension of QE,” said Adrian Schmidt, currency strategist at Lloyds Bank.
There was little reaction in sterling to a CBI industrial trends survey that showed British factory orders shrank in January, though at a lower pace than forecast.