By: Dr. Mike Campbell
UK inflation has been well above its target level for many months and this has fuelled speculation that the Bank of England’s Monetary Policy Committee (MPC) would vote to increase interest rates above their record low level of 0.5% this month or next. In the event, the MPC decided to leave the rate on hold for a further month, giving priority to supporting the recovery over reining-in inflation. The MPC has long been split over the best way to proceed between those arguing that inflationary pressure must be checked and those saying that nurturing the recovery must be the priority.
The Bank of England had argued that inflation (whilst remaining above the target level of 3%) would moderate towards the end of the year. However, data just released by the Office for National Statistics shows that inflation, as measured by the Consumer Price Index (CPI) has declined in March to 4% from 4.4% in February. The fall has largely been attributed to a record decline in the cost of food and non-alcoholic drinks which fell by 1.4% against the same period last year.
The broader based Retail Prices Index (RPI) also declined from 5.5% in February to 5.3% in March. The RPI figure includes the cost of interest repayments on mortgages.
The data caused Sterling to fall against other major currencies since the Forex markets interpret it to mean that the MPC will have more breathing room before it needs to increase rates to combat inflation. Last week, the European Central Bank increased its interest rate by 0.25% to 1.25% over fears of inflationary pressure within the Eurozone. Sterling stands at 1.6296 to the US Dollar, a fall of half a cent, and at 1.1249 against the Euro, a decline of 0.75 Euro cents.