UK inflation outlook

UK inflation is continued to be weighed on by the GBP strength and weak energy prices, albeit the rises in wages are an important determinate of the inflation, which is demand-driven.

November MPC minutes state that "the appreciation of sterling since mid-2013 was likely to continue to bear down on import price growth, and therefore CPI inflation, for a period".

BoE's UK effective exchange rate in August ramped up to solid level since 2008, making a 21% rise from 2013 lows. The rate has been volatile since then.

In October, the central bank retreated to 2-month low bringing some relief to the external sector though November brought one more move higher as the euro softened.

Currently the BoE expects CPI inflation to remain below 1% until the second half of 2016 reflecting the continuing drag from commodity and other imported goods prices. 

"Thereafter, the drag is forecast by the Bank to dissipate allowing CPI inflation to return to the 2% CPI target in the second half of 2017 and above it in 2018", says Rabo bank in a research note.

Rabo bank forecasts GBP/USD at 1.51 one month ahead, and EUR/GBP at 0.72.