Brexit Briefing: British Pound Can’t Catch A Break

The Pound made some small gains today after news that UK consumer price inflation held steady at 2.3% in March, matching the consensus.

But the stable headline figure was offset by a weaker core number – which fell to 1.8% in March from 2.0% in February, slightly below the consensus 1.9% – and it seems unlikely that the Pound can sustain its rally in the longer term if the CPI data continue to point to no precipitous shift in stance at the Bank of England.

One member of the bank’s Monetary Policy Committee — Kristen Forbes – wanted a rate rise when the BoE voted to keep interest rates unchanged at 0.25% at its meeting last month. That’s the first time in eight months the decision was split. Forbes, who significantly will step down for her role by June, said that UK inflation was rising fast enough not to be tolerated any longer and was likely to remain above the BoE’s 2% target for at least three years.

But Mark Carney and Co are looking through high headline inflation rates, which they say can be explained by the slump in the Pound sparked by last year’s Brexit vote. They’re more worried about weaker wage growth and retail sales.

Take the comments last week from MPC member Gertjan Vlieghe. He said a rise in interest rates in the short term is unnecessary because consumer finances are increasingly squeezed and the rise in inflation appears temporary. “Inflation is set to rise but that seems entirely accounted for by exchange rate pass-through, which, although persistent, will ultimately fade,” he said.

He added that wages showed “no sign of sustained upward momentum yet”, suggesting that “despite better than expected growth, we have not had higher-than-expected underlying inflation pressure”.

So without those signs of inflation bubbling under the surface, there’s no need to reverse last August’s decision to cut interest rates to 0.25% and expand quantitative easing. And with economic and political uncertainty likely to intensify as the Brexit process gets under way, policymakers at the central bank are likely to continue to stress the need to look through any further upturn in inflation and focus instead on the need to keep policy on hold to support economic growth.