Will a rise in the UK inflation spark the beginning of a double-dip recession?
- While uncertainty in the global economy escalates, the question remains whether the UK economy will slide back into recession. Weak economic data, a decision for additional quantitative easing and dovish comments by the Bank of England (BoE) reinforce the view that the UK suffers from stubbornly slow growth. Now our attention turns to Tuesday's inflation data and whether the figures will further trouble the Bank of England.
- During the last interest rate meeting, the Bank of England decided to increase the size of its bond purchase program by 75 billion pounds in an effort to stimulate the ailing economy. The country's interest rates were kept unchanged at the ultra low level of 0.5% and the central bank emphasised on the vulnerabilities due to the eurozone debt crisis that infected the banking and financial sector. The move stunned the market as this decision was not expected until November. Bank of England Governor Mervyn King said that he was forced to act quickly as the UK has no time to waste while the risk of the catastrophic consequences of a financial crisis is big. Chief Economist of the Bank of England, Spencer Dale, who was arguing for an interest rate hike in the months before, also warned of an economic slowdown and said the BoE expects the economy to continue to slow further in the fourth quarter.
- The BoE continues to follow a loose monetary policy in an effort to boost an economy deeply hurt by recession. The country's sluggish growth was made more evident after the second quarter Gross Domestic Product (GDP) shocked the markets by showing a disappointing 0.1% growth in the economy, down from a 0.2% increase in the first quarter. To make matters worse, the labour sector has also taken a massive hit. Unemployment in the UK is the weakest link in the UK's recovery path. Official figures revealed that the unemployment rate increased to 8.1% from a previous 7.9% in August and the number of unemployed people jumped to a 17-year high at 2.57 million. The data also showed that the number of unemployed people claiming benefits rose by 17,500 to 1.6 million in September.
- It seems the BoE's move to keep the country's interest rates at low levels was a simple decision to make. Slow growth signals the need for lower interest rates. However, slow growth and unemployment are not the only serious issues that the UK is facing. The economy is also suffering from a rising inflation. The Consumer Price Index (CPI) revealed that the country's inflation rose as high as 4.5% in the month of August while the central bank's target is only at 2%. The BoE forecasts inflation to hit 5% by the end of the year. Tomorrow at 08.30 GMT, inflation data for September will be revealed and investors are wondering whether we will witness a further rise in prices. A 0.4% month-on-month and 4.9% year-on-year gain is expected.
- Escalating inflation can hurt consumer spending and, in turn, can cause a further contraction of the already anaemic economy. It is a very worrying economic situation for the UK as it is forced to deal with slow growth as well as rising price levels, a condition called stagflation. The central bank's main tool to fight inflation is by increasing the interest rates. But such move is not wise in a time when the country is still battling to heal from the crisis.
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