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Published On: Tue, Aug 19th, 2014

The British pound hammered by UK inflation slowdown exceeding economists’ forecasts

UK inflation slowdown last month surpassed estimates, leaving room for the Bank of England to keep interest rates at record lows for some more time.

UK inflation slowdown last month surpassed estimates, leaving room for the Bank of England to keep interest rates at record lows for some more time.

The slowdown in UK inflation exceeded economists’ forecasts last month, which put the Bank of England in a good position to maintain record low interest rates.

Price growth slumped, from June’s 1.9 percent, to 1.6 percent, as announced today by the Office for National Statistics. The forecast was 1.8 percent, on the basis of a median estimate by 32 economists in a Bloomberg survey. Other data pointed eased pressure on pipeline inflation, as factory-gate prices marked their first yearly decline for about five years.

The key rate of BOE was maintained at 0.5 percent this month, and according to its Governor, Mark Carney, tightening is not yet warranted. There is acceleration in Britain’s recovery, which supports the view on withdrawing stimulus. Weak earnings growth and inflation staying under the targeted 2 percent, however, give arguments for keeping monetary policy easy for a bit longer.

The pound continued declining against the dollar, following the data release. At 4:10 pm GMT the GBP/USD was trading at $1.6610, 0.69 percent down for the day. Further losses are imminent as the pair broke through its 200-day Moving Average, currently located at 1.6668. The next support level for the currency pair is 1.6550, followed by the major 1.6460 hurdle.

The main reason for the downward pressure on the annual inflation rate last month were clothes due to a price hike in June, which was followed by deep discounts in the next month. From June to July, consumer prices declined by 0.3 percent.

Retail-price inflation exhibited a small slowdown, from 2.6 percent last month to 2.5 percent. It is a moving force for the bond market and a basis for wage negotiations.

Although inflation is below the level targeted by BOE, it is continuously surpassing wage growth, so consumers are in tight circumstances. The second quarter saw earnings decline by 0.2 percent annually, compared to a year earlier, the first drop since 2009. As a result, the BOE forecast of wage growth was cut last week.

The Producers Price Index Input pointed to a 1.6 percent month-to-month decline in July, the drop being 7.3 percent compared to last year. That is the largest annual drop since September 2009, the biggest culprit being crude oil.

Factory output prices were seen 0.1 percentlower for the month and for the year. The yearly decline was the first one since October 2009.

The Office of National Statistics issued a separate report today, pointing to a slowdown in yearly UK housing price growth, from 10.4 percent in May, to 10.2 percent in June. For the month of July the increase was 0.5 percent.

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