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14 Jan 2015
Will lower inflation change the picture for GBP? - UBS
FXStreet (Córdoba) - The UBS analyst team notes that it will be interesting to see how BoE officials balance the strength of the economy and the labor market against the drop in inflation, in the light of yesterday’s inflation figures and amid expectations oil prices will continue to depress the numbers on the upcoming months.
Key Quotes
“The official UK inflation measure dropped to 0.5% in December from 1% in November, below the market expectation of 0.7%. As expected, energy costs largely contributed to the fall. In fact, they pulled inflation down on two levels”.
“First, the base of year-on-year comparison is high, as gas and electricity bills increased markedly between November and December 2013. Second, the transport component of the CPI reflected the recent drop in global oil prices. The one-off base effect will drop off in the next inflation reading”.
“However, the oil price decline is likely to pull inflation even lower in the coming months. As seen in the Eurozone in December, we cannot rule out that UK inflation will also fall below 0%. That said, we also know that this is an oil-price-related drop, which does not really reflect pricing pressures throughout the UK economy. If the economy sustains its recovery this year and the labor market continues to heal in the coming months – with lower unemployment rates and faster wage growth – then more UK citizens should see higher real wages. This and the falling oil price would support the economic recovery further”.
“In the very near term, the drop in headline inflation will likely keep the Bank of England's monetary policy on hold. However, it will be interesting to see how officials will balance the strength of the economy and the labor market against the drop in inflation. Wednesday's Treasury Select Committee hearing with Governor Mark Carney could give further insight”.
“Over the medium term, we continue to see the GBP as one of the most attractive currencies in the G10 spectrum, given the UK's much stronger economic recovery”.
Key Quotes
“The official UK inflation measure dropped to 0.5% in December from 1% in November, below the market expectation of 0.7%. As expected, energy costs largely contributed to the fall. In fact, they pulled inflation down on two levels”.
“First, the base of year-on-year comparison is high, as gas and electricity bills increased markedly between November and December 2013. Second, the transport component of the CPI reflected the recent drop in global oil prices. The one-off base effect will drop off in the next inflation reading”.
“However, the oil price decline is likely to pull inflation even lower in the coming months. As seen in the Eurozone in December, we cannot rule out that UK inflation will also fall below 0%. That said, we also know that this is an oil-price-related drop, which does not really reflect pricing pressures throughout the UK economy. If the economy sustains its recovery this year and the labor market continues to heal in the coming months – with lower unemployment rates and faster wage growth – then more UK citizens should see higher real wages. This and the falling oil price would support the economic recovery further”.
“In the very near term, the drop in headline inflation will likely keep the Bank of England's monetary policy on hold. However, it will be interesting to see how officials will balance the strength of the economy and the labor market against the drop in inflation. Wednesday's Treasury Select Committee hearing with Governor Mark Carney could give further insight”.
“Over the medium term, we continue to see the GBP as one of the most attractive currencies in the G10 spectrum, given the UK's much stronger economic recovery”.