Price pressures in the UK ticked higher in the month of July with the consumer price index year-on-year increasing to 2.5% from 2.4% previously. This rise was as expected and as such the market reaction has been fairly muted although the pound is trading a little higher on the day. The core reading remained at 1.9% as was expected. The FTSE is trading lower by around 30 points as stock markets remain cautious despite the recovery seen in the Turkish Lira in the past 48 hours.
Stubborn above-target inflation supports recent BoE hike
The earlier CPI inflation data showed the first increase in the index of the year and in matching forecasts it improves a run which has seen 4 of the past 5 releases coming in below consensus expectations. After peaking at 3.1% last November this metric has come back closer to the 2% inflation level that the BoE is mandated to, but it appears to have flattened out around these levels. The data for March showed a print of 2.5% and after 3 consecutive 2.4% readings, today’s increase does seem to suggest that perhaps this indicator had stopped declining on its own and as such suggests that an August rate hike was the correct call to return it to target.
Doves have been openly critical of the decision to raise rates at a time when other economic indicators are nowhere near as supportive of such a move, but looking at it purely from an inflation perspective the decision appears warranted. Furthermore, the high levels of inflation seen last year were primarily caused by the depreciation of sterling following the Brexit vote, and when you consider that the GBP/USD rate has declined by more than 10% in recent months then there could be additional inflationary pressures lurking ahead, which will likely be kept in check to a greater extent given the recent tightening of policy.
Turkish Lira attempts to gain a footing
After the recent plunge, the Turkish Lira is on course for a second successive day of gains, but traders are still stepping with more than a hint of trepidation as far as the currency is concerned. While the situation is far far more extreme than that seen on these shores, the situation in Turkey is at essence an example of what happens when a central bank refuses to adequately tighten its monetary policy in the face of rising inflation. The Lira is looking to recover from its all-time low seen at the start of the week but news this morning that they had doubled tariffs on some US imports serves as a timely reminder that the country is not looking to back down tread the conventional policy path, and as such the risks of further escalations in the markets remains at elevated levels. Traders and investors, not just in Turkish assets, but in general remain on tenterhooks following the latest developments with fears that the crisis could blow up almost at any moment no doubt at the forefront of their minds.
