- UK inflation positive despite Brexit
- Weaker Pound to attract foreign investment
- BoE may consider further stimulus although data doesn’t support it yet
Yesterday the UK Inflation figures were released showing that the cost of everyday household goods and services grew 0.5% from the month of May. The year on year result showed a 0.1% improvement from June 2015. Considering the disruption caused the referendum caused it does pose some interesting questions.
The reason for the improvements is being placed with an increase in fuel prices and flights. Flights from the UK were up 10.9% as fans went to the Euro’s to support their teams.
The data that was taken for the latest inflation figure was recorded before the Referendum vote so any disruption that may have been caused after a Leave victory is to be confirmed. However fuel prices have continued to rise in the last few weeks despite the cost of a barrel of oil falling, this makes it possible that next month’s Consumer Price Index (CPI) figures may not show a major slowdown. Yesterday’s CPI figures are the last before the Monetary Policy Committee meets on the 4th of August and there is only one inflation report release before that date. I believe unless there is clear evidence that shows a major slowdown in the next two weeks, then it might be too early to cut interest rates.
Boost Output or Improve Inflation?
The recent weakening of Sterling may help to boost inflation levels and could allow the Bank of England to achieve the targeted 2% inflation for the first time since late 2013. Whilst Sterling’s weakness has made it more expensive for people to go abroad, it has created a very attractive opportunity for foreign investment. The post Brexit purchases of Poundland and ARM Technologies have already indicated that businesses have been quick to capitalise on the movement in their favour. The housing market in the UK could also present a major opportunity, especially as the 10% drop in Sterling has already created major savings. Some analysts believe that the housing market is set to weaken, however foreign investment may help to shore up any domestic shortfalls.
The Bank of England may consider further stimulus in the form of quantitative easing. This involves purchasing bank debt to increase the amount of cash that can be used for lending. However if the business sentiment reports are accurate and projects are on hold due to Brexit uncertainty there may not be an appetite for borrowing, which will just lead to banks owing the central bank more money. If the UK is able to avoid a rate cut in August I believe the GBP/EUR could move back towards the mid 1.20’s