The British pound appreciated and UK government bond yields rose after the country’s inflation rate unexpectedly rose, leading to a rethink on the Bank of England’s next interest rate decision.
Consumer prices in the UK rose 10.4% yoy in February, up from the previous month’s 10.1% rate and well above economists’ forecasts. Grocery costs are rising faster than ever.
Of greater concern was core inflation, which is depriving food and energy. It rose from 5.8% to 6.2%.
The BOE will meet on Thursday. Markets are now pricing in a higher probability of a 0.25 percentage point hike, a departure from Wednesday’s assessment, which was split between a hike of that magnitude and a pause. Investors also raised expectations for the top price.
Major central banks are struggling with how to offset high inflation at a time when the banking sector is under stress. The US Federal Reserve will also publish its latest decision on Wednesday.
“While the Fed has the luxury of being a little more dovish later today, the Bank of England doesn’t,” said Michael Hewson, chief markets analyst at brokerage CMC Markets.
Sterling appreciated 0.6% against the dollar and 0.4% against the euro as traders believed higher interest rates would attract more capital to the UK
UK bond yields rose, with the 2-year yield rising nearly 0.2 percentage point. Short-dated bonds tend to be more sensitive to interest rates. The yield on 10-year bonds also rose.
“What is certain is that UK inflation appears far from being under control,” said William Marsters, UK trader at Saxo Markets