This week it was announced that during February the UK experienced zero inflation for the first time in recorded history. This sent the money markets into a spin as they were just getting used to settling inflation and the prospect of rate rises sometime in the near future and they were hit with this shock news.
Historically low levels of inflation meant that a currency would strengthen against its peers as it was seen as stable and there was not an influx of “new money” into the system, it is also good news for consumers who feel better off as they earnings start to outstrip inflation in prices of good and services. However this news had the opposite effect and sent the Pound into a downwards motion against the Dollar and Euro.
The two main reasons behind this are that the main driving force behind the fall is plainly obvious and something that the whole world is experiencing and that is the huge fall in the price of oil. This is driving everyone’s inflation downwards, so is less of a clear indication of how an economy is performing. Secondly the BOE has stated that although rates rises are not likely any time soon, to rule them out based solely on an almost artificial fall in inflation would be unwise, which sets out their intentions to push ahead with a rise at some point.
So until the UK election in May expect the Pound to bounce around these levels before the result gives the markets more idea of where they think the UK economy will be heading.