Overnight the UK released its inflation data and it showed CPI climbing 0.1% m/m while the annual rate rose to 4.0%. Both hit economists' forecasts and now the annual rate is double the Bank of England's target of 2%.
From Reuters: Inflation surges to double Bank's target.
That meant that BoE Governor King had to write an Inflation Letter explaining why inflation is running so hot and what the bank is ready to do about it.
Here is the letter if you want to read it yourself: PDF.
The letter said that there is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal that there are real differences of view within the Committee, reflecting different judgement about the risks to that outlook.
While uncertainty remains about how inflation will proceed in the medium term, the next few months are likley to see the annual CPI rise to between 4% and 5% King wrote. That primarily reflects pass-through from recent increases in world commodity and energy prices. The bank therefore believes these upward pressures on price are temporary and will come back down to do substantial margin of spare capacity. We have been hearing that for a while from the BoE.
However the bank's policy makers do not want to upset an uneven recovery with rate hikes. The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.
Still, the sentence that helped the Pound from that letter was the proclamation: And no one should be in any doubt that when the balance of risks requires it, every member of the Committee is determined to act to adjust policy in order to bring the risks back into balance.
The bank does stand ready to act. We'll know more about the BoE's thinking tomorrow when we get our updated growth and inflation forecasts from the bank when it releases its Quarterly Inflation Report.