Pound Slumps Vs Euro and Dollar After Inflation Stalls in October - Easing Pressure on BoE

Inflation was expected to break above 3% for the first time since April 2012, but it stalled at 3%, dampening the case for further interest rate hikes from the BoE. 

The Pound slumped during early trading in London Tuesday after October inflation data showed price pressures stalling in the UK, easing pressure on Bank of England policymakers for further interest rate hikes.

Headline consumer price growth remained stable at 3% during October when it had been expected by economists to edge higher to 3.1%, which would have forced Bank of England governor Mark Carney to pen an open letter to the Treasury setting out a plan to return inflation to its 2% target.

Core consumer prices, which strip out movements in more volatile food and energy items, also remained static at 2.7% for the month when they too had been expected to rise by 10 basis points, to 2.8%.

Prices of food and non-alcoholic beverages rose during the October month but gains were offset by falls in the prices of motor fuel and furniture items, according to the Office for National Statistics report.

The Pound extended losses against both the Euro and US Dollar in response to the release, to be quoted 0.22% lower at 1.3086 against the Dollar 0.67% lower at against the Euro, making for a Pound-to-Euro rate of 1.1174.

Economists had expected UK inflation to top out slightly above 3% in either October or in November. Tuesday’s data may suggest that inflation actually topped out on the nose of the 3% threshold during the recent month.

If correct, that would pour cold water over the argument for further interest rate hikes from the Bank of England, which is bad news for the Pound.

“Inflation will probably still edge up further, as the 10% or so rise in sterling oil prices in November boosts petrol’s contribution to CPI inflation by about 0.05pp. But this is likely to be the point at which inflation peaks,” says Ruth Gregory, a UK economist at Capital Economics.

The Bank of England raised interest rates by 25 basis points in November, marking the first rate hike in more than a decade, as part of an effort to head off rising inflation. The bank rate now sits at 0.50%.

"We think that CPI inflation will be back below 3% by the end of the year and end 2018 at around 2¼%, as the inflationary impact of sterling’s fall fades," Gregory notes.

October’s inflation data comes less than an hour out from a European Central Bank event that sees BoE governor Mark Carney address an audience with a speech on the subject of central bank communications.

“Governor Carney will feature in the star-studded panel of central bank speakers in Frankfurt this week (Tue), we doubt that the BoE chief will attempt to actively talk markets up when it comes to the timing of the central bank's next rate hike,” says Viraj Patel, a strategist at ING Group.

It also comes amid renewed political instability in the UK after The Times reported at the weekend that some 40 Conservative Party MPs are prepared to sign a letter of no confidence in the Prime Minister, potentially triggering a broader confidence vote.

"Currently, the British pound is more exposed to the possibility of UK political uncertainty escalating again, after 40 Conservative members of parliament were reported to have agreed to sign a letter of no confidence against Prime Minister Theresa May,"says Chiara Silvestre, an economist at UniCredit Bank.

That said, close to 50 Conservative Party MPs would be required to force a confidence vote in the Prime Minister and a party majority would be needed if Theresa May were to be unseated.

This seems unlikely given the PM still enjoys the support of cabinet members on both sides of the Brexit divide, as well as among many key backbench MPs.

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