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Forex News – UK inflation and unemployment point to less need for early rate hikes
February 19, 2014 12:00 pmVideo
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Tuesday’s weaker-than-expected inflation report for January as well as today’s higher-than-expected unemployment rate signaled that those looking for an interest rate hike by the end of the year could be disappointed.
First of all, January’s inflation fell to its lowest since November 2009 at 1.9% against analyst expectations of inflation at 2.0%. The Bank of England expects inflation to fall further, according the forecasts contained in the Bank’s Quarterly Inflation Report, bottoming out at 1.7% during March before moving again somewhat above the 2% target later in the year.
Core inflation, which excludes energy, food, alcohol and tobacco rose even less by 1.6%, signifying that underlying inflation pressures were well contained.
January’s prices are usually much lower than December as it is sales season for a variety of shops. Although the data is seasonally adjusted to take this effect into account, gifts and other shopping item categories such as clothing, spirits, furniture and household goods and DVDs helped inflation to drop, according to the Office of National Statistics (ONS).
The importance of inflation for setting monetary policy could be higher following the abolition of the forward guidance rule that focused on unemployment.
The other surprise concerned unemployment, which rose to 7.2% in the October- December period from a previous reading of 7.1%. 7.1% was also the consensus forecast by economists. The claimant count, which is the number of people claiming unemployment benefits, fell by more than expected in January by 27,600, as economists expected a decline of 20,000.
The tick-up in unemployment was not something that was overly worrying since the unemployment rate fell rapidly in 2013; from 7.9% in January to 7.1% in November.
In other employment statistics, annual growth of average weekly earnings in the three months to December was slightly higher than expected coming in at 1.1% against expectations of a rise of 1.0%. During the same quarter (October-December) inflation was at 2.1%, as wage gains failed to match the increase in the general price level.
The pound had made a fresh 4-year high against the dollar on Monday at 1.6821. However, the lower-than-expected inflation and higher-than-expected unemployment caused traders to take profits on sterling’s recent gains, driving it lower to the 1.6660 level.
To sum up, the UK is looking forward to a positive 2014, during which it should be one of the fastest growing major economies. However, the recent data have stopped a process of the last few months that kept calling for an earlier start of interest rate hikes.
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