Inflation eased in February, suggesting the worst of the Brexit-driven price increases from the impact of the pound’s post-Brexit referendum is over. February’s inflation rose 2.7% y/y while core inflation gained 2.4% y/y. We expect the central bank to maintain the current policy rate in the next monetary policy meeting which is on March 22.

However, we foresee the central bank raising rates by 25bps in May. The gap between inflation and wages is narrowing. Wages rose 2.8% y/y in December from 2.5% y/y in 3Q2017. Thus, it will reduce the squeeze in earnings and strengthen domestically generated price growth. We expect the central bank in total to raise rates three (3) times over the next three years.

• Inflation eased in February, suggesting the worst of the Brexit-driven prices increases from the impact of the pound’s postBrexit referendum is over. February’s inflation rose 2.7% y/y from January’s 3.0% y/y. The core inflation gained 2.4% y/y from 2.7% y/y in January.

• We believe the easing trend of inflation is good news for consumers, who have been experiencing an erosion in their spending power over the past year.

• The Bank of England (BoE), which meets this week, expects headline inflation to subside further as the effects of sterling's 2016 deprecation fade. Despite the easing of inflation, it is still above the 2.0% target set by the BoE. In the coming monetary policy meeting, we expect the central bank to highlight that the easing of inflation was due to a stronger pound. We expect the BoE to maintain rates in the coming monetary policy meeting which is on March 22.

• However, we foresee the central bank raising rates by 25bps in May. The gap between inflation and wages is narrowing. Wages rose 2.8% y/y in December from 2.5% y/y in 3Q2017. Thus, it will reduce the squeeze in earnings and strengthen domestically generated price growth. We expect the central bank in total to raise rates three (3) times over the next three years.

Source: AmInvest Research - 21 Mar 2018