Fall in inflation points to prudent BoE policy

The slowing down in February inflation is certainly a relief for domestic consumer purses, while signaling a Bank of England policy that will be guided by prudence, as inflation pressures are easing.

Currently, the probability of a May Bank rate hike is above 60%, a probability we judge as high as we think that subdued economic activity is likely to dominate the Bank’s thinking.

Looking at the February inflation numbers, we note that a) the fall is mainly due to weaker average petrol prices, with fresh food prices also weighting on inflation; and b) the fall in the aggregate CPI index (from 3.0% to 2.7%) is below the Bank’s projection (according to its latest inflation report), therefore giving some leeway and to remain accommodative.

In the short term, a lot of attention will be put on this week’s MPC Meeting, in particular whether the reference to ‘developments regarding the withdrawal from the EU remain the most significant influence on uncertainty about the economic outlook’ will be modified.

Gero Jung – Chief Economist – Mirabaud AM