UK: Subdued inflation may result in additional BoE stimulus - Rabobank

Research Team at Rabobank, suggests that if UK inflation stays more subdued than expected, the BoE will gain some wiggle room to support growth through additional stimulus.

Key Quotes

“UK surprised with both CPI and core CPI coming in below expectations at 0.9% and 1.2% respectively. This is surprising given that British input prices have risen substantially, 12.2% y-o-y, on the back of sterling weakness.”

“Indeed, following the weaker inflation data, the market immediately raised its probability of further BoE stimulus. Nonetheless, according to Governor Carney, the outlook remains unchanged and prices will accelerate due to rising import costs.”

“Rising inflation, while perhaps welcomed by some central banks as it brings them closer to their mandate, is a risk to the consumer spending that is currently driving growth in mainland Europe and the UK. Consumer spending is susceptible to rising inflation if wages do not increase proportionally. As inflation is seemingly picking up in the Eurozone, consumers might start feeling the effects of higher prices on their disposable income. This could prove to be a drag on economic growth, at a time that foreign trade remains weak as well. The UK could be hit by an even greater inflationary shock, if the weaker sterling does lead to further imported inflation. Additionally, the surge in inflation expectations in the US following Trump’s victory and the expectation of loose fiscal policy is potentially spilling over to Europe; both 5y5y forwards and German bund yields have risen, indicating higher inflation expectations.”