BoE can breathe a sigh of relief, but caution is still required – Commerzbank

UK inflation surprises to the downside. Economists at Commerzbank analyze Bank of England’s outlook.

There is certainly a risk that the return to the inflation target will be bumpy

Wednesday’s UK inflation figures surprised to the downside. If there are no new upside inflation surprises in the coming months, the Bank of England is unlikely to raise interest rates again. Instead, the focus is likely to shift increasingly towards rate cuts.

We would still be cautious for now. One data surprise does not mean the all-clear has been given, and given the surprisingly stubborn UK inflation so far, there is certainly a risk that the return to the inflation target will be bumpy. Tuesday's much stronger-than-expected wage data also supports this view.

For now, the BoE can breathe a sigh of relief, but caution is still required. The Pound's rather muted reaction suggests that the market is taking a similar view.