Downside Surprise on CPI Inflation Data

The consensus forecast was for 7.0% for the CPI (Consumer Price Index) for the UK.  However, inflation unexpectedly fell from 6.8% to 6.7%.  It was previously at 7.4%. This was mainly a result of falling food and hotel prices.   Good news for consumers but what does this mean for england to raise interest rates?

Although this is good news, we still need to consider wage price inflation in the UK.  This has eased somewhat but is it is still on the minds of monetary policy makers at the BOE.  Thus, will the recent drop in the CPI is welcome, this does not mean that the pressure on bank of england is over.

Wage price inflation and expectations in the labor market plus higher energy prices, specifically oil, are major considerations for the monetary policy members at the BOE.  There is an economic slowdown coming in the UK, thus while CPI dropped, it is still high and one data point although positive does not policy.  Stagflation is a big risk in the UK, thus policy going forward is uncertain.  The BOE cannot risk taking the break off too soon thus we see more rate hikes needed especially for the UK.

The market has a high probability of a 0.25 rate hike with some at 0.5 rate hike.  We think the good news in the CPI inflation will provide some room for the policy, thus we see the 0.25 increase as the most likely outcome on Thursday.  UPDATE:  The BOE kept rates the same.

Other Central Banks this Week

The FED (Federal Reserve) is expected to remain on hold today with a rate hike expected in the November meeting.

The BOJ (Bank of Japan)) is expected to remain on hold on Friday with possible hikes later this year.

For these two central banks, the statements will more closely watched by the market this week.