GBP: Lower inflation again, but no change in interest rates – Commerzbank

Inflation in the United Kingdom was higher than expected in April. One reason for this was the sharp increase in travel prices, which pushed up both the core and headline rate, Commerzbank's FX analyst Michael Pfister notes.

BoE is likely to leave interest rates unchanged

"Consequently, the seasonally adjusted headline rate increased by 0.85% month-on-month, reaching its highest level in over two years. Such swings in sub-components are usually due to special factors and often even out the following month. Therefore, there is good reason to believe that today's figures for May will be significantly lower."

"However, it is unlikely that these figures will influence the Bank of England's (BoE) decision on Thursday. Instead, the BoE is likely to leave interest rates unchanged despite the recent weaker figures from the real economy. This view is supported by the fact that core inflation remains far too high, despite likely declining in May, and has shown no signs of improving sustainably for many months."

"Moreover, some policymakers have recently expressed satisfaction with the idea of cutting interest rates every three months. However, as the market has almost priced in unchanged interest rates, the decision is likely to have a neutral effect on the pound."