UK inflation: Push back towards zero levels on the cards - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 19, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – James Knightley, Senior Economist at ING, sees the risk that UK’s headline inflation drops back to zero today.

    Key Quotes

    “With wage growth staying subdued and Brexit concerns adding downside risks to activity, Mark Carney is likely to signal little chance of a BoE rate hike before the EU referendum.

    The November YoY% reading for headline consumer price inflation came in above zero for the first time in four months, but we suspect that plunging fuel costs mean that the annual rate (released today) has slipped back to zero for the December period.

    If we are right in our CPI prediction and if tomorrow’s UK labour report fails to show an acceleration in wage growth (we look for the 3M average for headline pay to slip to 2.1% from 2.4%) then market expectations for Bank of England policy tightening are going to be further pushed back while sterling will come under increasing downward pressure. We see these trends being intensified by Brexit uncertainty.

    It looks increasingly likely that the referendum on whether the UK is to remain a member of the European Union will be held in June or July, which will presumably make businesses and households more cautious in their spending plans. In an environment of limited inflation pressures, the Bank of England therefore have the room to keep monetary policy ultra-accommodative until the uncertainty passes.

    Our view is that the UK is probably going to narrowly vote to stay in (we will be releasing a formal Brexit macro note later this week) with activity likely to strengthen in 4Q. As a result, we think the earliest feasible date for a BoE rate hike is at the November MPC meeting.

    That said, we will be looking for clues from BoE Governor Mark Carney’s speech today where he is likely to address the implications of the plunge in oil prices and may also touch on what is going on in the labour market where pay has disappointed despite very robust employment gains.”
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