FxPro Forex Analysis: UK CPI slumps to 0.5%

The fall in headline UK inflation down to 0.5% was greater than expected (0.7%), although the core rate rose a touch to 1.3%, in line with expectations. Naturally, energy prices were the main factor in the lower headline reading, with housing and household services, together with transport costs removing 0.5% from the headline CPI rate. The were only marginal changes in other categories, which is why we saw just a small increase in the core rate. Not surprisingly, sterling was weaker on the news, cable falling below the 1.51 level towards the 1.5080. EURGBP has spiked higher to the 0.7830 level. The Bank will be forced to write a letter to the Chancellor explaining the reason for the undershoot of the inflation target (2% with 1% tolerance band), although this won’t be released until the middle of next month. The latest fall in the oil price could well mean we see still lower inflation next month. The dilemma for the Bank is to see through this and the impact on both the economy (less money spent on energy leaving more discretionary income for households) and also inflation expectations. For now, we continue to expect the Bank of England to keep rates on hold throughout the whole of 2015.