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19 May 2015
UK deflation temporary, November hike by BoE remains on cards – Danske
FXStreet (Barcelona) - Analyst at Danske Bank, Mikael Olai Milhøj, reviews the UK inflation data release, and further argues that the deflationary phase is likely to be temporary and inflation will pick up in H2.
Key Quotes
“UK CPI inflation was in deflation in April as the annual growth rate in the consumer price index fell to -0.1%, down from 0.0% in March (Danske Bank: 0.1% y/y, consensus: 0.0% y/y). This is the first time since the official records began in 1996 and the first time since 1960, based on historical estimations. Core inflation dropped against expectations to 0.8% in April from 1.0% in March.”
“Services inflation fell to 2.0% y/y in April down from 2.4% in March. This is the lowest reported since records began in 1996. This fall was also caused by cheaper air tickets. Higher inflation in services prices is needed for the Bank of England to hit its 2% inflation target, in particular since the strong GBP puts downward pressure on import prices.”
“As mentioned, the UK is now officially in deflation, but this is very likely to be temporary. We expect CPI inflation to pick up sharply in H2 when the base effects from the declines in energy and food prices begin to drop out.”
“Mark Carney, Governor of the Bank of England, has on several occasions stated that inflation could turn negative, implying that today’s figure should not affect the individual views of the members of the Monetary Policy Committee.”
“The very low inflation is good news for UK citizens who are experiencing positive real wage growth for the first time since 2009, which supports private consumption and hence the recovery.”
“We still expect the MPC to hike in November this year as the medium-term inflation outlook, in our view, still calls for tighter monetary policy. However, as core inflation is also low and sterling is strong, the MPC can be more patient with the first Bank Rate hike, which continues to be a downside risk to our current call.”
Key Quotes
“UK CPI inflation was in deflation in April as the annual growth rate in the consumer price index fell to -0.1%, down from 0.0% in March (Danske Bank: 0.1% y/y, consensus: 0.0% y/y). This is the first time since the official records began in 1996 and the first time since 1960, based on historical estimations. Core inflation dropped against expectations to 0.8% in April from 1.0% in March.”
“Services inflation fell to 2.0% y/y in April down from 2.4% in March. This is the lowest reported since records began in 1996. This fall was also caused by cheaper air tickets. Higher inflation in services prices is needed for the Bank of England to hit its 2% inflation target, in particular since the strong GBP puts downward pressure on import prices.”
“As mentioned, the UK is now officially in deflation, but this is very likely to be temporary. We expect CPI inflation to pick up sharply in H2 when the base effects from the declines in energy and food prices begin to drop out.”
“Mark Carney, Governor of the Bank of England, has on several occasions stated that inflation could turn negative, implying that today’s figure should not affect the individual views of the members of the Monetary Policy Committee.”
“The very low inflation is good news for UK citizens who are experiencing positive real wage growth for the first time since 2009, which supports private consumption and hence the recovery.”
“We still expect the MPC to hike in November this year as the medium-term inflation outlook, in our view, still calls for tighter monetary policy. However, as core inflation is also low and sterling is strong, the MPC can be more patient with the first Bank Rate hike, which continues to be a downside risk to our current call.”