Running against the expectations of both the market and the Bank of England (BoE), UK inflation held at 3.1% in August, the data left the pound largely unaffected.
The BoE has been steadfast in its projection that the rate of inflation will steadily drop back to the 2% target and over the past few months the rate has fallen from its peak of 3.7%. However, there will be a few nerves among the Monetary Policy Committee (MPC) members with inflation holding above the key 3%, the level above which Mervyn King has to write an explanatory letter to the Chancellor.
Duncan Higgins, senior analyst at Caxton FX, said; “It is perhaps a positive that the rate has not risen, but clearly inflationary pressures are not subsiding at the pace the BoE would like. This now marks the eighth consecutive month that the rate has held above 3% and the BoE will be only too aware that VAT is due to rise in January.”
The market reaction did take sterling higher, but the ascent was short lived with most investors realising that the data is unlikely to see any dramatic shift in opinion from within the BoE.
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