24 Mar 2015
UK approaching deflation – Danske
FXStreet (Barcelona) - Reviewing the UK inflation data release, Mikael Olai Milhøj, Analyst at Danske Bank, expects that inflation might fall below 0.0% in March.
Key Quotes
“UK CPI inflation declined to 0.0% y/y in February, down from 0.3% y/y in January (Danske Bank 0.2% y/y, Consensus 0.1% y/y). This is a new historical low and we are expecting inflation to go below zero in March. In other words, ‘deflation’ is approaching in the UK.”
“Core inflation declined from 1.4% in January to 1.2% in February. Although underlying inflation is low too, the figure still indicates that there are limited deflationary tendencies.”
“That the UK is approaching negative inflation does not surprise the Bank of England (BoE). In its latest Inflation Report from February, the BoE recognised that CPI inflation is likely to fall below 0% and stay very low for the rest of year. However, this is due mainly to falls in food and energy prices, which should begin to drop out at the end of the year.”
“BoE Governor Mark Carney has stated that it would be ‘foolish’ to add further stimuli as the very low inflation is due mostly to temporary factors and monetary policy works with a lag.”
“We still expect the BoE to raise rates despite low inflation if the medium-term inflation outlook calls for tighter monetary policy.”
“However, the minutes from the BoE’s Monetary Policy Committee (MPC) meeting in March revealed that the MPC has become more worried about the appreciation of sterling. The combination of subdued wage growth and a strong sterling could postpone the first hike.”
Key Quotes
“UK CPI inflation declined to 0.0% y/y in February, down from 0.3% y/y in January (Danske Bank 0.2% y/y, Consensus 0.1% y/y). This is a new historical low and we are expecting inflation to go below zero in March. In other words, ‘deflation’ is approaching in the UK.”
“Core inflation declined from 1.4% in January to 1.2% in February. Although underlying inflation is low too, the figure still indicates that there are limited deflationary tendencies.”
“That the UK is approaching negative inflation does not surprise the Bank of England (BoE). In its latest Inflation Report from February, the BoE recognised that CPI inflation is likely to fall below 0% and stay very low for the rest of year. However, this is due mainly to falls in food and energy prices, which should begin to drop out at the end of the year.”
“BoE Governor Mark Carney has stated that it would be ‘foolish’ to add further stimuli as the very low inflation is due mostly to temporary factors and monetary policy works with a lag.”
“We still expect the BoE to raise rates despite low inflation if the medium-term inflation outlook calls for tighter monetary policy.”
“However, the minutes from the BoE’s Monetary Policy Committee (MPC) meeting in March revealed that the MPC has become more worried about the appreciation of sterling. The combination of subdued wage growth and a strong sterling could postpone the first hike.”