UK headline inflation uptick will see BoE proceed with caution but spring cut still likely
The surprise upbeat in the December UK inflation report delivers a clear message: the path towards the Bank of England’s 2% target will be anything but plain sailing. While the core rate remained steady, the headline number unexpectedly ticked higher for the first time in five months, albeit this is partly due to one-off seasonal price hikes that could prove fleeting.
The MPC will look upon these temporary price increases with caution - indeed, this had already been accounted for in their projections and food inflation, which has been a key sticking point of late, actually rose much less than anticipated. Officials will still want to see more progress towards the 2% target, and this should still materialise in the coming months, particularly once household energy bills drop in April.
For now, we expect the Bank of England to stay on hold for at least the next couple of meetings, although a spring rate cut remains likely should inflation moderate as expected, while wage pressures continue to ease. Sterling has actually received almost no support from today’s data, and is trading effectively flat on the US dollar.
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.
