By Andy Scott, premier account manager at currency specialist HiFX
Sterling weakened against its major counterparties on Tuesday following the release of April’s consumer price inflation data. The annualised rate of inflation fell more than expected to 3%, the lowest since February 2010.
This will be welcomed by householders who have seen inflation eroding their spending power for the last few years as wage growth lagged the increase in the cost of various household bills and goods. If we continue to see inflation fall it should help boost domestic demand as consumers have more spending power. It will also be welcome news to the Bank of England who have faced growing criticism over inflation which hasn’t been below 3% since December 2009; forcing the governor to write continuous letters of explanation to the Chancellor.
The other benefit of lower inflation is it gives the Bank more room to ease policy which would likely be in the form of more quantitative easing, a process where the BoE creates money electronically and buys certain assets in the hope of increasing credit availability. Recently, the market has significantly reduced the expectations of further Q.E. and that had contributed to the recent gains seen in the Pound.
Our view was always that there remained a clear and present risk of more easing given the lack of economic recovery and the increased tightening of credit conditions brought on by the eurozone debt crisis, particularly in the last few months. A very timely comment just came from the IMF who said that the UK requires further monetary easing. The minutes from the BoE’s meeting this month will make for very interesting reading tomorrow and could well spark additional selling of the Pound if the committee are back in favour of more easing.
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