The Pound rose this morning against all other currencies as the Retail Price Index (RPI) came in at a barnstorming 3.7%. The significance of this is vast
The Bank of England’s Primary target is to keep inflation (as measured by RPI) at 2% with 3% being the upper limit. They use interest rates as their primary tool for achieving this. The Monetary Policy Committee was set up to keep inflation at this target. As inflation in the UK has been above 3% for 10 consecutive months now, the MPC is being put under pressure to increase interest rates. Economists were predicting that inflation for the last month would be about 3.3% and the actual figure of 3.7% was quite a lot higher than this.
The more dovish members of the Monetary Policy Committee have suggested that this spike is based on short term changes, such as unusually high commodity prices and January’s VAT rise. However RPI has now been over 3% (the upper limit) for over 10 months, so this argument is starting to wear thin.
Rob Carnell at ING Bank said: “With the bulk of the government’s public spending cuts yet to be fully felt, many on the MPC will no doubt argue that more time is needed to assess the impact on the economy, before responding to high current inflation – after all, the MPC targets inflation two years ahead, not today’s rate.
“Nonetheless, pressure on the doves to change their views is building. Markets will increasingly price in tightening this year.”
The pound responded to this news by shooting up against most currencies, including moving up to 1.6050 against the US Dollar. This is near the highest rate against the US Dollar over the past 12 months. Markets are now expecting a Bank of England interest rate rise by the end of the year.
Shortly after this the German ZEW index was released. This measures the economic sentiment in Germany, which is the powerhouse economy of Europe. The ZEW index soared to 15.4 points from 4.3 points in December, its highest level since July 2010. This data release signified that orders are strong for German companies and the German economy is well placed for 2011. This release resulted in a jump in the price of the Euro, causing the US Dollar to drop.
Today also saw the release of the Empire State Manufacturing Index in the US. This came in slightly below expectations which reduced market sentiment a little. Of greater concern was the release of disappointing revenues from Citigroup, the American banking behemoth. Revenues were stronger than a year earlier, however but they declined in the 4th quarter due to weaker trading.
Though banking data is not economic data, and any results are specific to that institution, any results from a major bank give an indication of the wider economy. The US Dollar strengthened this afternoon after this announcement, as risk appetite waned slightly. The US Dollar strengthens when investor sentiment declines as it is a safe haven currency.
