UK’s core CPI and headline inflation rose unexpectedly in March, likely stimulated by an early Easter, according to Nordea Bank. Headline inflation in the UK accelerated to 0.5% on an annual basis, the most rapid pace since December 2014. It was at 0.3% in February. Meanwhile, the core inflation rate accelerated to 1.5% in March from 1.2% in February. However, the headline inflation continues to be low in spite of the unexpected rise.
Persistent low inflation, along with weaker activity indicators in the UK, supports the view that the MPC will have a relatively dovish tone during its MPC meeting on Thursday, noted Nordea Bank. The officials are likely to maintain monetary policy, with a unanimous voting. However, a constant rise in wage pressures is likely to sway most of the MPC that threats to the target of inflation will skew on the upside by the end of 2016. Hence, the Bank of England is expected to first hike rates in Q4, assuming no Brexit, added Nordea Bank.
A mixture of accelerating wage growth, weaker sterling and slow growth in productivity gains will make sure that the headline inflation exceeds the 1% barrier in the fourth quarter of 2016, said Nordea Bank. But at present, Brexit is blurring the outlook for everything, including the central bank’s monetary policy, added Nordea Bank.
Since there is uncertainty regarding the EU referendum on 23 June, investors have not fully priced in an interest rate hike by the central bank until 2019. However, if the UK votes to stay in the EU, market will have to estimate an earlier hike. A hawkish re-pricing might be positive for the GBP, noted Nordea Bank. However, the poll is a close call. The Brexit poll tracker of Financial Times has indicated that there is just a narrow majority for staying in the EU. The poll shows 43% for “In” and 43% for “Out”.
