Not much upward pressure on UK inflation is expected this year. Still, the Bank of England sees the future move in interest rates being upward rather than downward. UK official statisticians are releasing February inflation figures on Tuesday .
London - The Bank of England (BoE) recently revised down considerably its short-term outlook for price growth when compared to estimates from the end of last year. The central bank now sees consumer price inflation rising more slowly to reach 1% as late as the end of this year, nearly half a year later than estimated in December.
The UK's Office for Budget Responsibility (OBR) also slashed its outlook for inflation, estimating CPI at around 0.7% toward the end of this year, down from 1.0% it anticipated in its previous outlook. The OBR then expects inflation to crawl up to 1.6% in 2017.
Weak inflation remains among the primary reasons the UK central bank remains very relaxed about tightening monetary policy. Subdued growth in earnings and strong disinflationary pressures spilling over from abroad in the form of cheap oil and other commodities continues to weigh on inflation in Britain.
The BoE rate-setting committee judged at its March monetary policy meeting that most of the increase in price growth in the UK this year was seen within non-core items such as energy and food, while core inflation was expected to increase more modestly.
"The expected rise in core inflation during the rest of the year was more modest, although the recent depreciation of sterling, were it to persist, could introduce upside risks to that forecast," the March minutes of the BoE Monetary Policy Committee (MPC) meeting read.
February expectations
Economists and foreign exchange analysts expect the sterling exchange rate to continue its highly volatile trend in the coming months, mostly skewed to the downside, with the June 23 EU referendum and the BoE's monetary divergence from the US Federal Reserve (Fed) being the main downward drivers.
Despite an increased level of uncertainty and softer global demand, BoE policymakers judged that interest rates were more likely to increase rather than decrease in the future, in order for inflation to return to its official target of 2% "in a sustainable fashion".
UK inflation edged up to 0.3% in January. Most of the upward pressure on CPI at that time came from a so-called base effect on the price of fuel, food and clothing - meaning those prices fell this year at a slower pace when compared to the same month a year ago.
Further upward pressure on the annual rate of CPI may be expected in February too, as prices for petrol between January and February this year (-0.2%) fell at a slower pace when compared with the same two months a year ago (-0.6%).
Market expectations ahead of Tuesday's CPI release suggest inflation in Britain picked up to 0.4% in February, while core inflation remained unchanged at 1.2%, after slowing in January from 1.4% measured in December.
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