Big surprise in UK CPI this week needed to trigger BoE into further rate easing
A slew of backwards looking data on GDP and employment came out somewhat better than expected and have done little to sway the Bank of England into aggressively easing rates. The UK economy grew by a solid 0.3% in the second quarter of the year, after economists were bracing for effective stagnation.
With demand still growing, even if only partly a byproduct of the recent pleasant weather, the MPC's focus should remain on reining in stubbornly high inflation, which remains almost double the 2% target level.
Swap markets currently see no change in the base rate for at least the next couple of MPC meetings, with a two-in-three chance of another cut in December. We think that there’s a good chance that we see no more rate reductions at all during the rest of the year, which should continue to support the pound.
Wednesday’s inflation report for July could be highly important in this regard, although it will probably take a big surprise here to bring further easing into view.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
