Knee Jerk Reaction to CPI Sends Pound Lower

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Bank of England inflationIn the United Kingdom, the Office of National Statistics reported earlier today that inflation hit a 4-year trough at 0.8%, below analysts’ forecasts of a decline to 0.9%. That pushed the Pound Sterling briefly lower against the Dollar and Euro as it is, once again, fueling investor speculation that the central bank might attempt to bolster the UK economy by reducing interest rates into negative territory. The Bank of England’s target inflation rate is set at 2%, and missing the target will require an explanation from the BoE Governor to the Chancellor of the Exchequer, explaining the miss and providing details on what the bank will do to reach the target. Analysts explain that while retail prices have fallen as well, because income has deteriorated as a result of the pandemic lockdown orders, consumers have become more price conscious and are wary about spending frivolously.

As of 11;14 am in London, the GBP/USD was trading at $1.2255, up 0.1193%, off the earlier low of $1.2209 while the peak was recorded at $1.22772. The EUR/GBP was higher at 0.8923 Pence, up 0.0617%; the pair has ranged from a low of 0.89090 Pence to a high of 0.89560 Pence in today’s session.

The Bank of England’s Governor will be speaking later today and could provide some indication of monetary policy in the near term. Late last week, Andrew Bailey had said that the bank did not have any intentions of lowering rates to negative, but he did not dismiss the notion entirely. Analysts say that the growing signs of an eroding economy may force Mr. Bailey’s hand at some point. Statistics show that the central banks which have already made such a move to negative rates have had only mixed success in encouraging spending and investment.

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