- UK inflation slightly beat expectations with 1.9% YoY.
- The BOE has yet another reason to raise rates.
- Brexit is in the way of everything, so a decision will have to wait.
The deceleration in inflation may have ended, or at least paused. The UK reported a slight acceleration from 1.8% to 1.9% in February after months of declines. Energy prices were responsible for the moderation and have contributed to the bump.
The data join the upbeat jobs report released on Tuesday, that showed a healthy growth rate of 3.4% in wages and a drop in the unemployment rate to 3.9%.
Both publications add to the case for a rate hike in the UK. A rise in interest rates will, in turn, push the pound higher. However, the reaction on GBP/USD was muted. The Bank of England convenes on Thursday, and they will likely sit on their hands once again.
Why? The answer should be evident to anyone following the news: Brexit. The uncertainty around Britain’s exit from the European Union paralyzes political life and economic policymaking in Britain.
The latest from the Brexit front is that the UK will likely ask for a short Brexit extension, postponing the precipice by only several months. However, as long as Brexit is orderly, things will return to normal. Assuming a no-deal Brexit is avoided, the recent data suggest the BOE may raise rates as early as August.
The next Quarterly Inflation Report is due in May, and that will be too early for a hike. However, by August’s QIR, more clarity is likely. If there is no severe disappointment in the data, the BOE is on track to hike, and GBP/USD will have more reasons to rise.
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