The pound rises after the hopes of a rate cut recede

The pound reached a new high against the US dollar, as traders re-wrote their bets about a rate cut by the Bank of England in the next month.

The pound rose 0.45 percent against the dollar, to $1.30. This is the highest level since July 2023. Official figures revealed that a key measure for inflation in the service sector remained unchanged at 5.7% in June. The Bank of England’s official inflation target for consumer prices was maintained at 2% last month. However, more stubborn measures did not drop as expected.

After the release of these figures, traders reduced their expectations for a rate cut to 25% from 50%. Financial markets predicted that the Bank would make its first rate cut since 2004 next month with a 70% probability earlier this month.

Investors sold UK government bonds and bought the pound, as they are sensitive to changes of interest rate expectations. The yields on the two-year gilts increased by 6.5 basis point to 4,01 percent, while those on the ten-year bond rose to 4,08 percent. These are measures of government borrowing costs. When a bond’s price drops, the yield increases. The currency strengthens during a period of higher interest rates.

The Office for National Statistics reported that goods prices dropped by 1,4% over the past year. Furniture, household items and clothing were the main culprits. The wet weather had a negative impact on summer sales for retailers.

Economists say that members of the monetary committee will now be reluctant to reduce interest rates, as the Bank’s predictions for services inflation are 0.6 percentage points lower. Inflation figures are also in line with growth statistics which show that the economy has grown at its fastest rate in two years, in 2024. This could prevent the Bank from easing monetary policy.

Sonali Punhani is a UK economist with Bank of America. She said, “Services inflation as well as wage growth are both high.” The Bank of America’s UK economist Sonali Punhani said that domestic inflation is sticky, which means that rate cuts are likely to be shallow and slow. There is a risk that Bank of America will be able deliver fewer reductions than our base case for two this year and four in the next.

Energy prices are on the rise after a sharp decline in last year, and economists expect that the headline inflation rate will increase from 2 percent to 4% over the next few months.

The MPC is scheduled to meet for its next meeting on August 1. It will also release a new set of economic forecasts and growth estimates.

Gabriella Dickens is an economist with Axa Investment Manager. She said that the nine-member MPC would still be able to vote by five votes to four to reduce the base rate next month from 5,25 percent to 5 percent. Andrew Bailey, the governor, along with his Sarah Breeden, Clare Lombardelli, and Sarah Breeden, would have to vote for monetary loosening in order to achieve a vote swing. Two MPC members, Swati Dhingra and Sir Dave Ramsden, supported a cut in rates in June.