Transfer Pound Sterling - GBP Exchange Rate Steady on UK Inflation Data

The pound enjoyed a steadier day in the markets yesterday as UK inflation data came in, in line with expectations.

The Office for National Statistics reported UK inflation was unchanged in December as rising gas and electricity bills were offset by the easing of air fares and a drop in petrol prices.

The Consumer Prices Index (CPI) annual inflation stood at 2.7%, exactly in line with expectations.

However, the Retail Prices Index, a wider measure that includes extra housing costs, was up slightly at 3.1%, from the 3.0% figure reported in November.

The Office for National Statistics (ONS) also reported that the average price of a home across the UK reached £232,000 In December. Excluding house price data from London and the South East, the average house price was £186,000, a rise of 0.8% over the year.

Commenting on the data, Dr Howard Archer, Chief UK Economist at HIS said “Extended low interest rates and the likely increasing beneficial impact of the Funding for Lending Scheme in supporting mortgage lending [will] counter still difficult economic conditions."

Meanwhile, the Centre for Economics and Business Research (Cebr) reported yesterday that the UK may be stripped of its AAA credit rating as the national debt continues to soar. The report predicts another 10 years of austerity for the UK as the country struggles to tackle its financial troubles. The think tank projects that the UK deficit will not be cut back until after 2020 and possibly not until 2023. They also predict that the UK will see sluggish economic growth of 0.5% and will continue to face tough economic conditions.

Scott Corfe, Cebr Senior Economist and the main author of the report said “Weak economic growth will hold back the deficit reduction programme over the coming years. In addition, there seems to have been a setback in reducing public spending – despite alleged austerity, we expect government consumption to have grown by 2.8% in real terms in 2012 – the fastest pace of growth since 2004. The combination of these two things means that the deficit reduction programme will stretch into not just the next parliament but into the one after that.”

Elsewhere, the World Bank has cut its global growth forecast for 2013 due to the difficult recovery that economies worldwide are currently undergoing despite the improvement in the financial markets. Specifically, it now expects worldwide growth of 2.4% this year, down from its prior forecast of 3%. The organisation indicated that a “real recovery” still needs to materialise and said it expects 2012 growth to clock in at 2.3%.

In Europe, eurogroup chief Jean-Claude Juncker warned on Tuesday that the euro’s recent rally to a 11-month high against the dollar and 9 month high against the pound poses a threat to the euro zone even as the region seems to be slowly but surely moving away from the height of its sovereign debt crisis.

Juncker bluntly stated that “The euro foreign-exchange rate is dangerously high”.

As if by magic, yesterday saw the publication of data from Germany that showed a slower-than-expected growth due precisely to a decrease in exports. A stronger euro makes euro zone products more expensive for countries outside the area.