High Inflation Fails to Support Sterling’s Gains

Despite UK inflation meeting expectations and remaining steady at an annualised 3.1% in September, the 10th consecutive month above the Bank of England’s (BoE) target has failed to translate in sterling’s favour, according to Caxton FX.

Having gradually fallen from April’s high of 3.7%, the Consumer Price Index (CPI) has now been stuck at 3.1% for the past three months, running against the stance of the BoE. The data leaves little doubt that Andrew Sentence, a member of the Monetary Policy Committee (MPC), will have stuck by his call for an immediate interest rate rise and is likely to have dissuaded the majority of the MPC from siding with member Adam Posen’s argument for further quantitative easing (QE).

Following the latest release of inflation data, sterling initially edged up to an intra-day high against the euro just shy of 1.15 but has since dropped back to nearer 1.1450. In failing to drop back below 3% yet again this month, inflation provides a particularly strong argument to keep the BoE from extending their QE budget.

Duncan Higgins, analyst at Caxton FX, said: “High inflation is about the only factor currently staying the Bank’s hand in terms of extending monetary easing. The BoE is maintaining its medium-term view that prices will start to decline, but clearly certain policymakers are not content with the apathetic response to inflationary pressures.”

Higgins added: “A single monthly reading is unlikely to impact on the Bank’s overall stance, but it may have prevented any further members from voting in favour of additional stimulus. Before a call on this question is made, the BoE will want to see an update on the indicators of economic growth. Concern that growth will slow over the coming months is at present the most prominent factor in the argument for QEII and is likely to continue to weigh on sterling’s prospects.”


Related reading

New consumer banking head for Citi Asia Pacific