Pound Weakens against South African as UK inflation slumps to session low

March 24, 2015 - Written by David Woodsmith

STORY LINK Pound Weakens against South African as UK inflation slumps to session low

The Pound fell by more than 0.80% against the South African Rand exchange rate after data showed that inflation in the UK fell to its lowest level on record by sliding to 0% in February. The weaker than expected report caused economists to raise their bets that the Bank of England will likely push any interest rate rise back further.

The inflation rate was shown to have fallen from the 0.3% figure seen in January to zero. Economists had been forecasting for an inflation drop to 0.1%. The cause for the drop in inflation was down to the sharp decline in food and motor fuels prices. Despite the figure being below expectations, some economists see the decline as a potential positive for the UK economy in the end.

Bank of England Governor Mark Carney will now have to write an open letter to the Chancellor of the Exchequer, George Osborne, as inflation is more than a percentage point below the central bank's target of 2.0%.

Core CPI, which excludes food, energy, alcohol, and tobacco costs rose at rate of 1.2% last month, down from 1.4% in January and below forecasts for a reading of 1.3%

‘It looks odds on that inflation will turn negative in March, when the cut in gas prices by British Gas...will show up in the inflation figures for the first time. Moreover, inflation is then likely to remain around zero or slightly negative for the rest of the year. However, we doubt that this will turn into more serious and ingrained deflation,’ said Vicky Redwood, chief UK economist at Capital Economics.

The South African Rand meanwhile advanced as it followed the stronger Euro higher and as domestic economic data offered support to the currency.
South Africa’s formal sector was shown to have created jobs in the final quarter of last year. According to the data released by Statistics South Africa, employment in the formal non-agricultural sector increased by 42,000 jobs from 8.947 million people in the third quarter to 8.989 million in the fourth quarter. The data also showed that job losses rose by a less than expected number in the construction and mining sectors.

Also supporting the South African Rand was news that South Africa’s sovereign credit rating will not be downgraded to speculative grade or junk status in June said credit ratings agency, Fitch.

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