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Inflation eases although UK rating comes under scrutiny

UK Consumer Price Inflation data for January came in at 3.6% the Office for National Statistics revealed today, considerably lower than the 4.2% in December. The fall was largely attributable the one off increase in VAT, from 17.5% to 20%, that occurred in January 2011. It is anticipated that the rate will fall further in coming months as contributions from petrol and energy prices become less significant. Bank of England Governor Mervyn King warned however that the timings in the decrease in inflation is highly uncertain, and Middle East tension could “materially impact on the inflation outlook”.

Whilst the above was warmly received, Moody’s cast a dark shadow over Valentine ’s Day by its overnight downgrade of a host of European countries, including Portugal, Italy and Spain. Whilst the agency maintained the triple a status of the UK, France and Austria, it lowered its outlook to negative meaning that there was a 30% that each nation would lose their coveted rating. The group highlighted question marks over the fiscal and economic reforms in the eurozone and the growth prospects for Europe. Specifically for the UK, high debt levels and weak growth prospects were cited, although Chancellor George Osborne retaliated by stating the move was proof the government needed to stick to its deficit cutting plans. Whilst the move will undoubtedly lead to political skirmishes fuelling opposition claims that the cuts are too far and too fast, the markets barely reacted to the threat and UK government bond yields were largely unchanged.

The downgrade was also shrugged off by an Italian debt auction, during which €6 million of bonds were sold with the three year debt averaging a yield of 3.41%, compared to 4.83% last month. The FTSE 100 opened up marginally lower and despite a rally around midday; finished 5.8 points lower, a loss of 0.1% to 5899.

This was posted in Bdaily's Members' News section by James .