Sterling was supported against the dollar and euro on Tuesday after higher UK inflation data in February. PPI input and output month‐over‐month increases were significantly higher than expected (+3.2% and 0.8%, respectively); however CPI was broadly as expected, rising 0.7%m/m and 2.8%y/y on headline and 2.3% on core.
GBPUSD hit an intraday high of $1.5143 and EURGBP fell to 0.8551. Markets saw this rise in inflation as reason that the Bank of England may shy away from adopting looser monetary policy. These stimulus measures that involve asset purchases tend to weaken a currency.
However, some analysts do not think it will lead the Bank of England to refrain from more QE.
Peter Dixon, from Commerzbank believes that:
“The slightly worrying thing was the change in the PPI numbers. The PPI input (price inflation) came in 3.2 pct on the month, which clearly indicates there’s a lot of pipeline pressure coming through, or going to come through, from the energy side, which supports our view that CPI inflation is going to spike at way above 3 percent in mid-year.
“What does it mean for the Bank of England? Not a lot, I don’t think high inflation will act as a deterrent to their desire to do something else if they want to do so, because you very much get the sense that they are more interested in growth than they are inflation at the current time.”
Vicky Redwood, from Capital Economics said the following:
“Energy prices drove the rise, as the last of the recently announced utility price hikes took effect. Of some comfort was that the core rate was unchanged at 2.3 percent… The new CPIH rate – which includes housing costs and may become the new targeted measure – was slightly lower than the headline rate at 2.6 percent.
“Nonetheless, inflation looks likely to rise further to peak of about 3.5 percent over the summer, driven in part by rising food and petrol prices. And while it should ease back thereafter, the rise in import prices likely to result from the recent fall in the pound could slow that fall.
“However, the MPC has already indicated that it will look through this period of high inflation in order to support growth. And if the Chancellor announces a change to the Bank of England’s remit in tomorrow’s Budget, the MPC may be able to take an even more flexible approach to inflation-targeting. So rising inflation should not stop it from undertaking more QE within the next couple of months.”