Inflation numbers not enough to prevent an Interest Rate cut – 20th July 2016
Inflation numbers not enough to prevent an Interest Rate cut
After a passable performance on Monday, Sterling was on the back foot yesterday and ended up as the back-marker among the major currencies, falling by an average of 0.5%. On the day it was down by a third of a Euro cent and one US cent. It was up though by 1% against the Turkish Lira as investors sold the currency after learning that the government purge had broadened to include teachers.
The UK inflation data yesterday was theoretically positive for Sterling; consumer prices rose by 0.2% in June, lifting the inflation rate from 0.3% to 0.5%, and the retail price index was up from 1.4% to 1.6%. However, those numbers were nowhere near high enough to stand in the way of the Monetary Policy Committee if it wants to cut the Bank Rate next month.
The International Monetary Fund published its World Economic Outlook update on Tuesday afternoon, entitled “Uncertainty in the Aftermath of the U.K. Referendum”. As a result of the vote “the global outlook for 2016-17 has worsened”. The update notes that “Among advanced economies, the UK has experienced the largest downward revision in growth forecasts”, which is now estimated at 1.7% for the current year and 1.3% in 2017. The equivalent numbers for Euroland are 1.6% and 1.4% while for the US they are 1.8% and 1.8%.
Those numbers suggest cumulative growth over the two years will be identical in the UK and the Eurozone of 3%. A fact investors recognised in their treatment of the Euro and Sterling, selling both against the US Dollar with only a third of a cent to separate them. The case against Sterling might have been more compelling because of the greater uncertainty but the Euro was also hurt by sharp falls for investor sentiment in Germany and Euroland.
The most important data today’s is UK employment but the pound could also be sensitive to Theresa May’s performance as she answers Prime Minister’s Questions for the first time and investors will certainly be keen to hear what comes of her meeting with Chancellor Merkel in Berlin.
Like yesterday’s inflation data, today’s job numbers relate to a time prior to the Brexit vote. Also in common with the CPI figures, they will have little bearing on next month’s Monetary policy decision. That being the case, they ought not to have much effect on the value of Sterling. However, it is easier to see disappointing numbers sending the Sterling lower than strong ones helping it higher.