Business World

Sunday 4 December 2016

Sterling weakness persists despite inflation at year high

Published 17/02/2016 | 02:30

Bank of England feels inflation will remain below its target. Photo: Reuters
Bank of England feels inflation will remain below its target. Photo: Reuters
Sterling also dropped to a two-week low against the dollar and sank versus all but two of its 16 major peers. Photo: PA

Inflation in the UK has edged up to a 12-month high, but even that hasn't helped to strengthen the pound.

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With just days to go until a much-anticipated EU summit which will focus on David Cameron's proposed package of reforms for the European Union, sterling briefly strengthened in the wake of the inflation data, before weakening again to 78p.

Consumer price inflation in the UK dropped by 0.8pc on the month, reflecting post-Christmas discounts and a drop in airfares. However, the annual rate rose to 0.3pc, its highest since January of last year.

January's rise was caused by smaller falls in food and fuel prices than a year ago, and a modest rise in the price of clothes, the Office for National Statistics said.

But the inflation rate remains well off the 2pc target put forward by the Bank of England.

And persistently low inflation means that an interest rate rise is increasingly unlikely.

London-based think tank CEBR (Centre for Economics and Business Research) said a small rise in inflation was anticipated.

British annual inflation has been below the Bank of England's 2pc target for two years and last year it was zero, the lowest since comparable records began in 1950.

The BoE said earlier this month that it expected inflation to stay below 1pc all year and to undershoot its target until 2018, due to the global slump in oil prices, the effect of past rises in sterling and lacklustre wage growth.

Fears that a weakening global economy and sharp stock market falls might sap the strength of Britain's moderate domestic recovery mean few economists expect the BoE to raise rates before late this year at the earliest.

Many in financial markets think it could take much longer, and see a risk that the BoE could instead be forced to cut rates below the record-low 0.5pc where they have languished for almost seven years.

Sterling also dropped to a two-week low against the dollar and sank versus all but two of its 16 major peers.

The UK's reform package is expected to be discussed at a summit of European leaders tomorrow and Friday. (Additional reporting Reuters)

Irish Independent

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