GBP to EUR: Inflation accelerates but no one is expecting a shift in attitude at the Bank of England

Tuesday, 13 September 2011 14:17

In normal times any indications that inflation was accelerating would boost the prospects for the British Pound (GBP).

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The GBP to EUR exchange rate is at 1.1587.

The UK inflation rate accelerated to 4.5% in August from 4.4% in July, according to CPI annual gauge, adding to concerns that the UK may suffer from stagflation.

Normally such a reading would provide a boost to the GBP as markets would take it as a sign that the Bank of England would be considering raising interest rates.

However, the UK economy is essentially on the road to nowhere - a stagnant economy is unlikely to see interest rates hiked as this would only make things worse.

Hence, the GBP has actually weakened against the EUR on the back of the latest data.

The rally in monthly inflation was led by rising cost of clothes and household utility by 3.7%% and 0.5% respectively.

Indeed, oil prices are remaining stubbornly high and all indications point to them maintaing their strength.

This creates the kind of inflationary pressure that the Bank of England is simply unable to manage.

The BoE predicts the rate to reach 5 percent in 2011, yet easing in 2012 and 2013, where it expects it to reach 1.8 percent in the second quarter of 2013.

It also expects an ease in inflation as the temporary factors boosting that rate will diminish, yet the precise time for the fall remains highly uncertain, making the possibility that inflation would exceed or become below 2% target in the medium term is "judged to be roughly equal."

Accordingly, the bank sees its currently monetary policy, keeping interest rate and APF on hold, is suitable to reinvigorate recovery.