IN FOCUS | UK INFLATION
UK inflation data may be far higher than the Bank of England target, but there is little risk of a hike in interest rates this year. Governor King has made it clear that he welcomes fiscal tightening rather than higher interest rates. As this takes a hold, King’s conviction that excess capacity will bear down on prices is likely to be strengthened. Sterling is likely to draw little incentive from this week’s policy meeting. The impact on the pound from comments from Fitch, the credit rating agency, that the UK’s fiscal challenge is “formidable” lasted little more than one trading session. S&P provided a similar warning thirteen months ago and in the intervening period the problem of the UK’s huge budget deficit has been widely publicised. Not only that, but the new UK coalition government has been busy in the past few weeks warning that the age of austerity is now upon us. The budget is scheduled for 22 June. Insofar as the government is apparently committed to deficit reduction, the outlook for gilts and the pound has improved, especially against the euro. Given that sterling is still 21 per cent weaker against the euro than its average level of 2007, the downside bias in euro-sterling is likely to persist and upticks could be good buying opportunities for sterling.