Inflation falls warning sign for exchange rates

18 February, 2015

Robin Haynes

Yesterday’s UK inflation figures, as expected, dropped to their lowest levels since the ‘CPI’ measure of inflation was introduced in 1988. Prices in the year to January rose just 0.3%, due largely to falling fuel and food prices.

While low inflation is good for consumer’s purchasing power and government smugness, it is not necessarily good news for a country’s currency. For a start, it makes interest rate rises less likely, and a lower expectation of interest rate hikes causes a currency’s value to fall. Thankfully, the Bank of England’s quarterly inflation report had already warned of lower inflation in the coming weeks, so the effect was not as profound as it might have been. The pound did however fall nearly a cent against the Euro.

The real test for the UK economy will come if and when lower oil and food prices stabilise – it is interesting that so-called ‘core’ inflation is actually running at 1.4%, which was higher than the expected figure.

So as usual with official statistics, a mixed bag which can be viewed as both positive and negative for your exchange rate for sending money abroad.

Time running out for Greece

The Greek government is today expected to request a 6 month extension to its current loan agreements, if the EU, IMF and ECB will climb down on some of the accompanying austerity measures that go with it. Prime Minister Tsipras has already called the ‘troika’ proposal to extend its bailout under current terms, as “absurd”, and wants instead to be given time to negotiate a long term solution to its debt crisis.

Time is running out however, because any new deal would have to be ratified by member governments before the end of the month, and neither side looks willing to compromise. With an estimated €2bn of deposits being taken out of the Greek banking system every week, and the current loan programme due to end on February 28th, a stalemate could cause Greece to literally run out of money within weeks.

If a political solution can be found in the next 10 days, we could see Euro strength and therefore rates for sending Euro payments would worsen for those of you exchanging from sterling. If a deal is not struck, will the Greek government and people accept continuing austerity? Unlikely, and the alternative – leaving the Euro – would be a seismic event, both politically and economically.

Central Bank minutes today

Today also sees the release of minutes from the recent central bank meetings of both the Bank of England (9.30am) and Federal Reserve (7pm), and to add to a myriad of current events we also have UK unemployment at 9.30am, all with the potential to move the markets when it comes to currency values. With so much going on, it is imperative to speak to us at Currency Index if you have any upcoming international payments.