GBP: Positive CPI surprise would alter BoE’s trade-off in favour of tightening - ING

UK CPI inflation is expected to come in at 3.0% YoY today – and just within the +/-1% tolerable band around the 2.0% target – meaning that Governor Carney won't be required to attach an additional letter to the Xmas card that he will be sending the Chancellor this month, according to Viraj Patel, Research Analyst at ING.

Key Quotes

“The consensus is that inflation is set to peak and slowly return back towards 2.0% as the post-Brexit GBP depreciation shock wares away. However, any positive surprises over the coming months – or signs of inflationary persistence – would alter the Bank's growth-inflation trade-off in favour of further tightening. In this scenario, calls for a second rate hike in May-18 could gain traction – and this hawkish front-end re-pricing in the UK curve is what we see as the catalyst to take GBP/$ beyond 1.36 at the turn of the year.”