UK inflation unexpectedly rises for first time in four months

OVERNIGHT

Asian equity markets are again up this morning following gains in US and European markets yesterday. That suggests markets are more hopeful that the recent problems revealed at some banks will not prove to be widespread. In the UK, ahead of a parliamentary vote today, Democratic Unionist MPs and some Conservative MPs have criticised elements of the amended agreement reached with the EU on Northern Ireland trade. However, reports suggest that the government still expects to win the vote. 

Just released UK inflation data for February showed the first rise in annual CPI inflation in four months to 10.4% from 10.1% in January. The rebound was led by an increase in ‘core’ inflation to 6.2% from 5.8% previously. 

THE DAY AHEAD

Today’s key event is the monetary policy update by the US Federal Reserve. Until the recent banking issues emerged, this was expected to result in another rise in interest rates. There had even been speculation that after slowing the pace of its hikes to just 25 basis points in February, the Fed may now pick it up again to 50bp. 

That picture has changed and a 50bp hike now seems unlikely. Indeed, it is possible that the Fed will choose to make no move at all. Fed policymakers have been in their usual pre-announcement ‘silent period’ over the past week and a half which means that they have not publicly commented on developments or offered their usual policy guidance. This makes this probably the most uncertain Fed update for a long time. A 25bp hike is perhaps the most likely outcome but the decision seems to be on a knife edge.

This is also one of the meetings where Fed policymakers update their economic projections, including the so called ‘dot plot’ of interest rate expectations. Policymakers may now temper their previously indicated intentions to raise their rate predictions judging that the tightening in financial conditions will do some of the work for them. However, it seems unlikely that they will revise down their previous forecasts, which will leave rate expectations for the end of this year above 5%. That is well above current market expectations which now see the likelihood of significant rate cuts this year. Market reaction to that may depend, among other things, on Fed Chair Powell’s press conference, particularly how concerned he sounds about recent events. 

Elsewhere several European Central Bank policymakers will speak at a conference. Meanwhile, officials from the Office for Budget Responsibility will brief a House of Commons select committee on last week’s UK budget.

MARKETS

Global bond yields rose yesterday led by US Treasury yields ahead of today’s Fed policy update. In currency markets, sterling slipped against both the US dollar and the euro yesterday. However, it has rebounded overnight after the stronger than expected inflation data, which is seen as raising the odds on another UK interest rate hike on Thursday.