UK in­fla­tion un­ex­pect­edly falls, eases rate-hike fears

Econ­omy will ad­just over time to weaker ster­ling: Ham­mond

Kuwait Times - - BUSINESS -

In­fla­tion in Bri­tain un­ex­pect­edly fell in the year to June, of­fi­cial fig­ures showed yes­ter­day in a de­vel­op­ment that’s likely to ease mar­ket ex­pec­ta­tions that the Bank of Eng­land will raise in­ter­est rates soon. The Of­fice for Na­tional Sta­tis­tics said con­sumer prices were 2.6 per­cent higher in the year to June, down from 2.9 per­cent the pre­vi­ous month. The con­sen­sus was that in­fla­tion would rise to 3 per­cent, which would have been a full per­cent­age point higher than the Bank’s tar­get rate.

The sur­prise fall, the first since last Oc­to­ber, was largely due to fall­ing gas prices at the pump as lower whole­sale crude prices were passed on to driv­ers. De­spite the fall, liv­ing stan­dards in Bri­tain are still fall­ing as price in­creases out­pace wage rises.

In­fla­tion has risen sharply from last June’s 0.5 per­cent largely be­cause the coun­try’s vote to leave the Euro­pean Union trig­gered a 15 per­cent drop in the value of the pound. Though a lower pound may help ex­porters sell their wares in in­ter­na­tional mar­kets, all other things be­ing equal, it makes im­ported goods such as food and en­ergy more ex­pen­sive.

The spike in in­fla­tion over the past year has caused con­cern among some rate-set­ters at the Bank of Eng­land. Last month, three of the eight mem­bers of the bank’s Mon­e­tary Pol­icy Com­mit­tee voted to in­crease the bench­mark in­ter­est rate by a quar­ter-point from the record low of 0.25 per­cent. The rest though, while ac­knowl­edg­ing the in­fla­tion spike, thought a rate hike could be coun­ter­pro­duc­tive for the Bri­tish econ­omy, which grew by less than any other Group of Seven coun­try in the first quar­ter of the year. The main un­cer­tainty sur­round­ing the Bri­tish econ­omy re­lates to Brexit and what trad­ing re­la­tion­ship the coun­try will have with the EU af­ter it leaves the bloc in March 2019. The Bri­tish gov­ern­ment has only just started full-scale Brexit dis­cus­sions with the EU and there are fears that the coun­try could end up crash­ing out of the bloc with no deal, which could re­sult in tar­iffs be­ing slapped on Bri­tish goods.

The pound fell sharply af­ter the in­fla­tion data as traders priced in a lower in­ter­est rate pro­file. By mid­morn­ing London time, the pound was 0.3 per­cent lower at $1.3019. Ear­lier it had hit a 2017 high above $1.31 as traders bet that the in­fla­tion data would be higher than an­tic­i­pated and po­ten­tially force the hand of the bank to raise in­ter­est rates soon. Ben Bret­tell, se­nior econ­o­mist at stock­bro­kers Har­g­reaves Lans­down, said eas­ing in­fla­tion, if sus­tained, could help shore up the Bri­tish econ­omy in the months ahead as econ­o­mists had ex­pected real in­comes to con­tinue to fall with neg­a­tive reper­cus­sions for re­tail sales.

“If this fails to ma­te­ri­al­ize the econ­omy could see a stronger sec­ond half to the year,” he said. Econ­o­mists re­main split as to how in­fla­tion will pan out over the com­ing months largely be­cause there’s un­cer­tainty sur­round­ing the value of the pound. How­ever, if the cur­rency sta­bi­lizes then the im­pact of last year’s de­pre­ci­a­tion will start to drop out of the an­nual com­par­i­son and that could see in­fla­tion fall back to­ward tar­get and help sup­port the econ­omy. But as with al­most every­thing about Bri­tain, Brexit will re­main the driver.*

Weaker ster­ling

Over time Bri­tain’s econ­omy will adapt to changes in the value of ster­ling, fi­nance min­is­ter Philip Ham­mond said yes­ter­day when asked by a law­maker about the im­pact of the fall in the pound since the coun­try voted to leave the Euro­pean Union. “The short run ef­fect of a de­pre­ci­a­tion of ster­ling would be ex­pected to be a de­cline in our trade bal­ance per­for­mance as we suck in more ex­pen­sive, in ster­ling terms, im­ports,” Ham­mond said.

“But over time, and there’s signs the econ­omy is do­ing this now, the econ­omy will ad­just, with ex­porters in­creas­ing their out­put to take ad­van­tage of weaker ster­ling and their greater com­pet­i­tive­ness in in­ter­na­tional mar­kets.” — Agen­cies

Philip Ham­mond

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