UK: Sterling effects are dragging the inflation lower – Nordea Markets

Analysts at Nordea Markets suggest that Sterling effects are dragging the UK inflation lower month by month currently, but still Bank of England expects domestic cost pressures to counter the Sterling effects.

Key Quotes

“Just last week the most dovish member of the MPC, Dave Ramsden, reiterated that “although imported inflation falls back as upward pressure from sterling’s depreciation comes to an end, domestic cost pressures keep inflation close to target in the medium term.”

“On our models the Sterling effects more than counters the effects from a rising domestic cost pressure – and to put it a little frank, Sterling effects always counter domestic effects in UK inflation. So expect UK core inflation to continue to drop.”

“Hence, we don’t buy the +50% probability of an August hike from BoE, but as long as the MPC continue to believe that inflation will stay high, the GBP should remain underpinned from the story of an August hike. But the story could very well end up as a replica of story ahead of the May meeting. First stronger GBP, then markedly weaker GBP, when the MPC backs off a hike.”