Forex News – Pound drops after UK inflation data

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UK CPI data were released today showing that inflation fell to its lowest in more than two years in April. CPI on year-on-year basis fell marginally to 3.0 percent, which is lower than the 3.1 forecast. This means that the Bank of England has room to manoeuvre and could introduce another round of quantitative easing if required to stimulate to British economy.

The Bank of England will not be required to write a letter to the Chancellor of the Exchequer. In the past few months due to stubborn high inflation, the BOE Governor Mervyn King had to write an explanatory letter to the Chancellor of the Exchequer, George Osborne. The central bank has a target inflation rate of 2 percent. A rise of 1 percent above that requires an explanation letter.

The ONS said the fall in annual inflation was driven by lower inflation for air and sea transport, clothing and alcohol.

However, the monthly gain of 0.6 percent in CPI highlights that inflation remains a sticky point as other factors continue to play.

Core CPI, which excludes food and fuel costs, and has been a particular source of concern to some BOE policymakers, fell to 2.1 percent, its lowest since November 2009.

Inflation has now been above the BOE 2 percent target for almost 2-1/2 years. It predicts that the rate will fall by to 1.6 percent by mid-2014.

Sterling fell against the dollar after the data, with GBPUSD dropping to 1.5763 from 1.5832 where it was just before the news at 08:30 GMT.