LONDON: The British pound pulled back on Wednesday after data showed UK consumer inflation hit a new 40-year high, cementing bets for more Bank of England interest rate hikes in the coming months.
Soaring food prices pushed consumer inflation to 9.1%, the highest rate out of the Group of Seven countries and underlining the severity of the cost-of-living crunch.
The figure was in line with market expectations and following its release money markets continued to fully price in a 25 basis point (bps) BoE rate hike in August. The odds of a 50 bps move stayed above 60% but fell from around 74%.
“The latest temperature check of the UK economy shows the mercury rising again, with no end yet in sight to the feverish pace of price rises,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “The Bank of England has already forecast that inflation will hit 11% by the autumn, and it’s steadily creeping towards that ugly marker sooner rather than later,” she added.
In morning trading in London, sterling fell against a broadly stronger US dollar and was down 0.7% at $1.2910 following two days of gains. Versus the euro, the pound fell 0.4% to 86.18 pence.
Pound rises vs dollar
The BoE raised its benchmark rate by 25 bps to 1.25% last Thursday and said it was ready to act “forcefully” if needed to stamp out dangers posed by inflation, although that lagged stronger action from other central banks including the US Federal Reserve.
ING said it saw scope for a 50 bps BoE rate hike in August.
“UK inflation remains above 9% and the recent rise in energy costs will probably help the headline rate go slightly into double-digits from October,” said ING economist James Smith “The chances of a 50bp Bank of England rate hike in August are rising, though we think there’s only so much further it can hike in the current fragile growth environment,” he added.
Traders were also keeping an eye out for two by-elections on Thursday: one in Tiverton and Honiton and another in Wakefield in northern England.
Defeat in either place may further dent Prime Minister Boris Johnson’s vote-winning reputation, and see lawmakers who fear for their futures try to move against him despite giving him a reprieve by calling and losing a confidence vote against him earlier this month.