HiFX comments on the inflation report
Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, comments on the inflation report.
“The Bank of England’s inflation report today gave a positive outlook for the UK economy and indicated that the recent drop in inflation is temporary, requiring interest rates to rise within the next two years.
“Given the recent action by a number of central banks to loosen monetary policy in response to weak demand and falling rates of inflation or deflation, today’s inflation report was slightly more hawkish than expected. It certainly puts the BoE as an outlier in terms of its policy direction considering recent easing by the ECB, with interest rates basically at zero and QE launching next month and negative rates in Denmark, Switzerland and Sweden (after they cut today). Looking at their forecasts for growth and unemployment, which are both expected to benefit from the significant drop in oil, you can understand their thinking. But you have to wonder how much the UK economy will be shielded from the weaker growth being seen elsewhere, including in China, which might only be a direct concern for luxury goods makers, but which has an overall impact on global sentiment.
“Sterling rose following the BoE report and was dealing around a cent higher against both the dollar – close to a 1-month high and a similar amount against the euro, close to the 7-month high reached earlier this week. With the Bank of England sticking by its plans to raise rates, albeit at a point that’s been continually pushed out further into the future, sterling will remain strong. In particular, it is likely to fair well against currencies where interest rates are being cut, such as Australian dollar and the Swedish krone.”
