Sterling saw a significant rise following the release of the latest British inflation figures, strengthening expectations of another interest rate hike by the Bank of England. The pound surged 0.35% against the dollar to $1.275 and reached 85.68 pence against the euro. While the headline rate of UK consumer price inflation slowed to 6.8% in July, core inflation, which excludes volatile food and energy prices, remained unchanged at 6.9% from June, surpassing economist predictions of 6.8%. Additionally, services inflation increased to 7.4% from 7.2% in June.
Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, noted that core inflation remains stubbornly high at 6.9% and is now slightly above the headline level. This poses a challenge for the Bank of England as it hopes to see this less volatile measure decline, indicating that cost pressures are sustainably returning to target.
Separate data revealed that British house prices rose by 1.7% in the 12 months leading up to June, marking the smallest increase since July 2020. The country’s housing market has faced pressure from higher mortgage rates following 13 consecutive interest rate hikes by the Bank of England. In addition, data released on Tuesday showed that British wages grew at a record pace in the second quarter, further fueling concerns about inflation for the central bank.
Money market traders now fully anticipate a 25 basis points (quarter point) rate hike at the Bank of England’s next meeting in September. However, due to persistent inflation, they have begun factoring in a roughly 10% chance of a larger half-point rate increase, according to Refinitiv data. Moreover, market expectations indicate a total of 75 basis points of rate hikes by February, suggesting that the Bank of England’s bank rate could reach 6%, up from the current 5.25%.
Hussain Mehdi, macro and investment strategist at HSBC Asset Management, highlighted that the extent of monetary policy tightening required in the UK will likely be more substantial compared to the US and eurozone. The ongoing shortage in UK labor supply is leading to upward pressure on wages, necessitating a “higher-for-longer” interest rate scenario.
The elevated rate of British inflation can be attributed to increases in the prices of airline tickets and hotels. Additionally, there was a 1.7% rise in the cost of renting property, primarily in public housing.
Sources: Reuters, Bloomberg