The pound reached a new high of one year against the dollar after UK inflation data for June came in slightly higher than expected at 2%.
The data showed that consumer prices were higher than analysts’ expectations of 1.9%, and traders reduced their bets on whether the Bank of England would lower interest rates next month from their 16-year high.
The Office for National Statistics’ Inflation Figure, however, was still at the BoE target level. It had been reached in May for only the third time since 2003.
Investors, who had previously evenly divided the odds, now put the probability at just under a third of a quarter point rate cut in the next month.
The pound rose to $1.3044 – its highest level in over a year – before dropping back slightly and trading 0.4 percent higher for the day, at $1.3007.
The Monetary Policy Committee (MPC) has indicated that it is moving closer to lowering interest rates from the current 5,25 per cent. This would depend on the policymakers’ confidence that the underlying price pressures have been fully controlled.
The stubborn growth of services prices, seen as a key indicator of inflation, has caused concern. Services inflation held steady at 5.7% in June, which was higher than analysts’ expectations of a drop to 5.6 percent.
Paul Dales, Capital Economics, said that the shock was the stable services inflation rate of 5,7 per cent. “As a consequence, the odds of a rate cut in August are a little less likely.”
The MPC will make its next rate announcement at the August 1 meeting.
The King’s Speech will outline the plans of the new Labour Government in order to “take off the brakes” and spur economic growth.
Darren Jones said, “It’s good to see that inflation is on target but prices are still high for many families in Britain.”
This government has taken the difficult decisions to repair the foundations now so that we can rebuild Britain.
The biggest price increases in the past year were driven by restaurants and hotels. The core inflation rate, which excludes energy and food, remained at 3.5 percent, in line with analyst’s forecasts and the same as May.
Two of the nine MPC Members argued for a reduction in rates.
Other members have indicated they are close to supporting a rate reduction, but the latest economic statistics may complicate their decisions.
Huw Pill, BoE’s Chief Economist, , said this week the central bank has made “substantial” progress in its efforts of bringing down price pressures, but added recent indicators still pointed to an “upside risk”.
The MPC will examine the UK labour market data, which is scheduled to be released Thursday. This information can provide a better indication of the health of the economy.
Rob Wood, Pantheon Macroeconomics said that the MPC would have to proceed slowly due to the persistent wage growth and CPI. We also expect the rate-setters will wait until September to make their first cut.
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