U.K headline inflation decelerates in February

The U.K. headline inflation slowed in the month of February from the prior month. On a year-on-year basis, the consume price inflation dropped to 2.7 percent from January’s 3 percent. The outturn was a bit more subdued than the anticipated 2.8 percent. The deceleration in inflation was mainly because of the waning effect of the earlier softness in the British pound and an associated deceleration in import price inflation. More specifically, the softness was mainly seen in food, transport, and hotel and restaurant costs. The core rate of inflation also dropped a bit more sharply than anticipated to 2.4 percent.

The Bank of England is expected to take some comfort from today’s report, noted Lloyds Bank in a research report. Still, both inflation rates continue to be above the Bank’s 2 percent target and the report released today says nothing about the possible build-up in pipeline pressures. While externally driven inflation pressures are likely to continue to subside, weak productivity and rising pay growth pose an upside risk to domestically generated inflation, stated Lloyds Bank.

The labor market report is set to be released today and is expected to provide more color on the extent to which wage pressures are building. The Bank of England would be watching these developments closely ahead of its announcement on Thursday.

“In the wake of yesterday’s EU transition deal, and with inflation expected to slow only gradually, the Bank may feel more comfortable raising interest rates over the coming months. We do not expect a move this week, but it could use Thursday’s meeting to position a rate rise for May – in line with current market pricing”, added Lloyds Bank.

At 15:00 GMT the FxWirePro's Hourly Strength Index of British Pound was highly bullish at 166.387, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 61.1441. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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