Pound Falls versus Swiss Franc (GBP/CHF) after UK Inflation Softens Further than Estimated

March 24, 2015 - Written by Frank Davies

STORY LINK Pound Falls versus Swiss Franc (GBP/CHF) after UK Inflation Softens Further than Estimated

The Pound slipped lower against the Swiss Franc on Tuesday when the UK’s level of inflation slipped below expectations.

The UK’s Consumer Price Index hit 0.0% on the year in February, despite economists’ estimating a smaller dip from 0.3% to 0.1%. However, the fall wasn’t exactly a surprise, with the Bank of England suggesting that the UK could enter a period of disinflation in coming months. Analyst Danielle Haralambous commented: ‘The likelihood that we are on the verge of a period of deep and prolonged deflation in the UK remains slim. Recent deviations in inflation from target have been largely driven by lower food and energy costs, which will provide a welcome boost to real household incomes and support prospects for the demand-driven recovery.’

The problem with lower inflation is that investors begin to push back increases in borrowing costs in coming months. The Bank of England has been hot and cold when it comes to rate hikes, seemingly changing its mind on whether the time is ripe or not. Before inflation began falling significantly, the central bank had seen two members of the committee vote in favour of immediate rate increases. However, the softer inflation saw the dissenters return to the general consensus that rates should remain stable at 0.50%.

Furthermore, UK wage growth is struggling to make any decent progress and with the general election just around the corner, political debate could begin to get extremely heated. Labour MP Cathy Jamieson stated: ‘Inflation is falling around the world because global oil prices have plummeted, yet in Britain wages continue to be sluggish. Working people are £1,600 a year worse off under this government. And another Tory VAT rise if David Cameron wins the election will hit living standards and send prices rising again.’

Meanwhile, the Swiss Franc could be in for some movement on Wednesday with the UBS Consumption Indicator due for publication. The Franc rose higher against other majors on Tuesday after beginning the session lower. The Franc enjoyed support from factory improvements in some of the most influential EU economies. The Franc also enjoyed a little support from the Swiss National Bank’s decision to keep interest rates at -0.75% rather than cutting them again. Rabobank stated: ‘CHF net positions turned positive for the first time since May 2014. The SNB refrained from further policy stimulus last week.’

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