European indices are expected to open moderately higher on Tuesday as investors eye the release of U.K. inflation figures this morning.
U.K. inflation has been near zero for most of this year and actually dipped into deflation territory back in April, although a large part of the decline can be attributed to the sharp fall in energy prices which is seen as being net positive for the economy. Core inflation has remained well below the 2% target but some of this can probably be attributed to indirect impacts of these stimulative energy price declines.
UK Core CPI
Prices are expected to have not risen again in July while core prices growth is expected to remain at 0.8%. The recent collapse in commodity prices is likely to apply further downward pressure on inflation in the months ahead, as highlighted by the Bank of England in its latest inflation report.
While these are seen as being a benefit for the economy, policy makers are likely to be deterred from raising rates in this environment. The strong pound is already having a detrimental effect, particularly on manufacturing, and while consumer inflation expectations don’t appear to be declining, that doesn’t mean they won’t and policy makers are unlikely to want to take risks with the recovery.
Rate hike expectations have already been pushed back to the second quarter of next year and a more prolonged period of no inflation is only going to push it further. More unexpected price declines today could encourage investors to further revise their rate hike forecasts today which could weigh on the pound, a move that would probably be welcomed at this stage.
Greece continues to be a story that hangs over the markets at the moment. Tomorrow’s vote in the Bundestag is unlikely to run into any serious difficulties, especially given that the deal has the full support of both Angela Merkel and Wolfgang Schaeuble, which should allow Greece to make its €3.2 billion payment to the European Central Bank of Thursday.
The constant murmurings out of Greece regarding a confidence vote and possible snap elections this year do remain a concern though. The country needs political stability right now and a government that is committed to implementing the necessary measures to ensure the bailout runs smoothly. The economy suffered enormous damage during negotiations this year and it can’t be expected to go through more of the same.
For a look at all of today’s economic events, check out our economic calendar.