By Claire West

Running against the expectations of both the market and the Bank of England, UK inflation held at 3.1% in August, the data left GBP largely unaffected.

The Bank has been steadfast in its projection that the rate of inflation will steadily drop back to the 2.0% 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 MPC members today with inflation holding above the key 3.0%, the level above which Mervyn King has to write an explanatory letter to the Chancellor.

Duncan Higgins, senior analyst at Caxton FX says, “It is perhaps a positive that the rate has not risen, but clearly inflationary pressures are not subsiding at the pace the Bank would like. This now marks the eighth consecutive month that the rate has held above 3.0% and the Bank 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.

“Despite remaining at a stubbornly high level, it is unlikely that the CPI figure will warrant any significant reaction from the BoE at their next meeting. The broad opinion is still largely, that prices will continue to drop back steadily over the remainder of the year. Consequently there has been little reaction from the market. Sterling enjoyed a brief bounce but the data is not going to offset the general bearish sentiment still focused on the UK economy,” continues Higgins.

Higgins adds, “Even when we saw inflation rising at an unnerving pace earlier in the year the Bank was unmoved, so it’s unlikely that this pause in the rate of decline will have much impact on opinion.”

Following some weak data from the eurozone this morning the pound has recovered back toward 1.20 against the euro. However, the data has offset any positive influence from the UK inflation figures, and sterling is currently heading back below $1.54 against the dollar.