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Budget Day 2009

Currencies Direct April 22nd 2009 - < 1 minute read

From the UK we had the release of the latest inflation data from the Office for National Statistics (ONS), which sounded the long-awaited capitulation of the Consumer Price Index (CPI) to deflationary pressures, falling from February's 3.2% down to 2.9%. Unlike the stubborn CPI measure, the Retail Price Index (RPI) continued its slide, registering a decline of nearly half a percent, to a headline figure of -0.4% (down from 0% in February). 

This continued divergence between the rates of decline for CPI and RPI (decreases of 0.2% vs 1.3% in 2009) could provide the Bank of England with a headache going into its next Monetary Policy Committee meeting in early May. The problem arises from the MPC's requirement to bring CPI in line with the target range of 1.5% to 2.5%, but at the same time it will be extremely conscious that any further falls in RPI will have a dampening effect on aggregate demand (and so serve to prolong and exacerbate falling consumer spending), as wages, pensions and welfare benefits are benchmarked to this inflation rate.

In terms of a policy reaction to this data, we are unlikely to see any movement on the interest rate front as the BoE continue to focus on monetary expansion, but at the same time any further increase (or on the back of the RPI figure maybe a decrease) of Quantitative Easing (QE) is doubtful, as the MPC looks to hold off making any rash decisions while it assess the results of the measures already in place.

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Currencies Direct

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