Monthly Economic Review: British Pound

Is it just me or is the pound getting heavier these days? The British currency has dipped to five-year lows to the dollar and has given up a lot of ground to its forex rivals this week. If you’re wondering what’s up with that, you should have a look at these latest reports from the U.K. economy.

Inflation

uk oil pricesAs with most economies these days, weak inflation continues to be a pain in the neck, with overall price levels still reeling from the oil price slump. In the U.K., the annual CPI is at its lowest level in 50 years, as headline inflation fell to 0.3% in January. The core version of the report, on the other hand, has ticked up from 1.3% to 1.4% in the same month.

Inflation has actually been treading below the BOE’s 2% target for more than a year already and analysts project that further price declines are likely. Producer input prices have chalked up a 3.7% decline for January, following December’s 3.3% drop, which suggests that consumer price levels might suffer more downward pressure in the coming months.

Spending

While BOE Governor Carney previously brushed off the inflation slump and assured that this would translate to stronger consumer spending, recent retail sales figures show that this ain’t happening just yet. In January, retail sales fell by 0.3%, worse than the estimated 0.1% decline.

On a larger scale, businesses seem to be doing much better, with most industry PMIs chalking up back-to-back months of stronger than expected readings. The only downside is that the services sector, which accounts for a huge chunk of overall economic activity in the United Kingdom, logged in a decline from 57.2 to 56.7 in February and indicated a slower expansion in the industry.

Employment

It wasn’t all gloom and doom in the U.K. though, as the economy still managed to print a pretty decent employment figure for February. Hiring picked up by 31K during the month, slightly higher than the projected 30.6K increase in jobs and enough to keep the jobless rate steady at 5.7%. Aside from that, the January reading was upgraded from an initially reported 38.6K increase to a 39.4K gain.

It seems that bleak wage growth stole the spotlight though, with average earnings posting a mere 1.8% rise versus the estimated 2.2% increase. This probably explains why stronger than expected hiring still doesn’t seem to be translating to higher consumer spending yet.

BOE Minutes

Given these so-so reports, it’s no surprise that BOE officials weren’t their usual optimistic selves based on the latest MPC meeting minutes. In fact, policymakers highlighted the pound’s appreciation as a potential risk.

As it turns out, the rising value of their local currency is contributing to weaker inflation, which might delay them from tightening monetary policy. Recall that the BOE has been one of the more upbeat central banks these days, with central bank officials emphasizing that their next policy move is likely to be a rate hike.

For now, BOE officials still maintained that they were “more likely than not” to hike interest rates within the next three years. This didn’t seem to impress pound bulls so much though because, well, three years is a pretty long time and anything can happen then. When do you think will the BOE actually increase interest rates?