UK inflation edged lower in January, but what matters more for the central bank is the recent strength in wage growth. That said, the outlook for interest rates is still solely dependent on Brexit and that means policymakers will remain on the sidelines for the time being.

For the first time in two years, UK inflation is back below the Bank of England’s 2% target. That said, the fall from 2.1% to 1.8% in January largely reflects the dip in global oil prices towards the end of last year. Our commodities team expects prices to stabilise more-or-less this quarter, which should mean a more benign year for UK inflation. Depending on what happens to petrol prices, we expect headline CPI to remain fairly sticky in the 1.5-2% region for much of this year.

For the Bank of England though, what matters is where inflation goes beyond 2019. Wage growth has stayed strong, and amongst the short-term Brexit warnings, the Bank of England still hinted last week that mounting domestic inflationary pressures could require a faster pace of tightening than currently anticipated by markets. This is one reason why we don’t think a rate hike should be ruled out just yet this year.

Whether core inflation does respond to higher wage pressures relies partly on corporates having sufficient pricing power to pass the costs on. In the current consumer environment, this may not be the case.

As ever though, the outlook for interest rates really depends on Brexit, and with a growing likelihood that the saga could stretch to the eleventh hour, the economy is in for a bumpy ride over the next few weeks. Reports indicate it might not be until the 21 March EU Council meeting before talks reach a crunch. For businesses, this would mean not knowing what trading terms they’ll face as soon as the following week.

At the very least, this uncertainty will keep hiring and investment on hold, keeping a lid on growth. In the meantime, the Bank of England will remain firmly on the sidelines.

Content disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more here: https://think.ing.com/content-disclaimer/

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD: Inverted hammer on daily chart highlights 50-day SMA, 38.2% Fibo.

EUR/USD takes the bids to 1.1050 during early Friday. The pair formed an ‘inverted hammer” candle while following the daily chart, which in turn favors the upside towards 1.1110/13 resistance-confluence.

EUR/USD News

GBP/USD: 3-week-old resistance-line questions 100-DMA breakout

Successful trading beyond 100-day simple moving average (DMA) fails to lend much strength to the GBP/USD pair as it struggles around 1.2520 during Friday morning. A rising trend-line since August-end, seems to challenge buyers.

GBP/USD News

USD/JPY: Bears eyeing break below 107.45

USD/JPY trades modestly flat, with the bias leaning to the downside, as we wind down into the close for the week following a data-heavy number of sessions which have left more questions unanswered and the outlook murky. 

USD/JPY News

Markets unmoved by Fed cut and pause

The Federal Reserve’s latest twist in monetary policy, reducing the fed funds for a second time in two months and then pausing for instructions has left markets without a clear direction on interest rates. Equites ended mixed.

Read more

Gold holds on to recovery gains amid trade/political pessimism

In addition to bouncing off multi-month-old rising trend-line, Gold gains support form recently downbeat trade/political headlines while taking the bids to $1,500 during Friday’s Asian session.

Gold News

Forex Majors

Cryptocurrencies

Signatures