August inflation data of 2.9% y/y is the highest level in more than five years, thanks to the rising cost of clothing and airfares. It saw the pound jumping to a one-year high against the USD to 1.33 and rose strongly against the euro to 1.11 as investors factor in a greater chance of the BoE to be more hawkish when it meets to discuss the monetary policy later this week.

Our take is that in the coming Monetary Policy Committee (MPC), the BoE will want to be hawkish by keeping a rate hike on its radar, appeasing the investors. If more than two of the members of the MPC vote for a rate hike, it should see the pound strengthen.

We believe the policy rate will remain unchanged due to the mixed signal between the strength of the economy due to uncertainties from Brexit and inflation driven by the weak pound. Besides, inflation should peak by October to about 3.0% – 3.1% and start easing thereafter, giving some room for wages, which have been lagging against inflation, to narrow the gap.

• August inflation data of 2.9% y/y versus 2.6% y/y in July is the highest level in more than five years, thanks to the rising cost of clothing and airfares. Following the inflation data, the pound jumped to a one-year high against the USD to 1.33 and also rose strongly against the euro to 1.11 as investors factor in a greater chance for the Bank of England (BoE) to be more hawkish when it meets to discuss the monetary policy later this week.

• In our view, the latest inflation data has complicated the BoE’s job. Inflation pressure remains partly due to the weak pound following the Brexit. At the same time, consumers are having a tough time after losing their purchasing power with wages lagging behind inflation.

• Our take is that in the coming Monetary Policy Committee (MPC), the BoE will want to be hawkish by keeping a rate hike on its radar, appeasing the investors. If more than two of the members of the MPC vote for a rate hike, it should see the pound strengthen.

• Underpinned by a mixed signal between the strength of the economy, which remains a concern due to uncertainties from Brexit, and inflation driven by weak pound, we expect the BoE to maintain the current policy rate. Besides, we foresee inflation should peak by October to about 3.0% – 3.1% and start easing thereafter. That will give some room for wages, which have been lagging against inflation, to narrow the gap.

Source: AmInvest Research - 13 Sept 2017