Pound Unexpectedly Drops On BoE Forecasts Of 4 Percent Inflation
Under normal circumstances, high inflation readings and expectations are a guaranteed currency booster. This was the thinking going into today’s UK CPI numbers. The consumer basket reported a 0.6 percent rise in headline inflation through the month of May that boosted the annualized figure to a decade high 3.3 percent clip.
Though, considering the core annualized number ticked higher to a 1.5 percent pace, it was clear that most of the pressure was found in volatile components like food and energy. Nonetheless, with headline inflation at a decade high and above the 3.0 percent tolerance limit; BoE Governor Mervyn King, for the second time since the central bank was made independent in 1997, had to write a letter to the Chancellor of the Exchequer detailing why inflation was so high and what would be done to curb it. Forecasts for price growth to top 4.0 percent in the second half and remaining above target into 2009 suggested action was necessitated. However, this was immediately cut short by comments that “the path of the bank rate that will be necessary to meet the 2 percent target is uncertain” and “the committee will maintain price stability by ensuring that the rise in inflation is temporary.” Without action on the BoE’s part, inflation at these levels is merely a burden on growth - and therefore the pound - going forward.