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UK Economic Update – 29 March 2015

UK inflation drops to another record low as FTSE 100 falls on concerns over monetary policy

The FTSE 100 fell last week after having broke through the 7,000 barrier in the previous period. While some form of consolidation may have been to be expected, much of the downward pressure appears to have been the result of concerns over policy maker intentions to push ahead with 2015 interest rate hikes in the US and the UK.

The resolve of officials at the BOE and Federal Reserve appears to have struck a nerve with some investors given that inflation remains at record lows on both sides of the Atlantic, while both economies have also cooled slightly during the first quarter.  

In terms of UK economic data, CPI figures released last week showed that inflation fell further than expected during February, to 0.0%, for the first time on record.

Asides from being in contrast to our expectation this is slightly alarming because oil prices, the primary drag on inflation over the last 12 months, actually rebounded quite sharply during February ($40 p/b > $60 p/b). This uplift has led to higher inflation in both the US and Europe for the month of February, but not in the UK.

Despite the above, the governor at the Bank of England remains of the view that the current low inflation is likely to be temporary and that, for this reason, an interest rate increase is still firmly on the cards for 2015.

Most of the incoming economic data for the UK remains positive at present, which supports the argument for higher rates this year, although economic indicators could cool off slightly as the general election approaches and uncertainty increases within the business community.

A case in point would be the release of UK retail sales data last week which highlighted a sharp increase in discretionary spending in February, at a rate of 0.7% on a month on month basis, which was ahead of expectations for growth of 0.4%.

Looking ahead the UK economic calendar is sparsely populated for the current week, although next week will see another round of PMI surveys released (Manufacturing, Construction & all important – Services PMI); which will be interesting given that we are now within six weeks of the general election.

FTSE 100 / 10 Minute Intervals

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