The rapid rise in UK inflation risks causing a crisis, so that the BoE is increasingly pressured to raise interest rates. These expectations strengthen the Pound Sterling today.
The pound sterling strengthened against the US dollar and the euro, supported by expectations of a higher interest rate hike by the Bank of England (BoE) due to high inflation in the UK. In early Friday (18/February) trading session, EUR/GBP was down 0.32% to 0.8340, while GBP/USD was up 0.34% to 1.3628.
UK inflation hits record high since 1997
The latest UK Inflation data released on Wednesday showed another acceleration. UK inflation grew 5.5% on an annual basis, higher than the BoE estimate of 5.4%.
The data further strengthens speculations of another BoE rate hike. Investors expect the BoE to raise interest rates by 50 bps in March to tackle inflation problems. The UK central bank predicts that inflation will peak to 7.25% in April, triple the previous estimate.
According to Yael Selfin, chief economist at KPMG UK, rising UK inflation will deal a severe blow to society as the impact of rising energy tariffs takes effect. "The BoE is signaling its determination to keep pace with the inflation curve. In the short term, this will add pressure to earnings as lenders will continue to raise interest rates on borrowers," the economist said.
Bloomberg economist Dan Hanson is more focused on the size of the interest rate hike needed by the BoE. Hanson said, "The question of whether the UK will raise interest rates in March has been answered clearly from the latest series of UK economic data releases. The more pressing issue now is, will there be an event that makes interest rates have to be raised more than 25 bps? Baseline forecast we're still on a 25 bps increase, but a 50 bps increase cannot be ruled out either."
Pound continues to strengthen after the release of UK inflation data today. In fact, the escalating Russia-Ukraine conflict and generally being able to depress high-risk profile currencies like the Pound sterling is showing no impact today.
Simon Harvey, European Monex analyst said that Sterling is now being resistant to a decline in risk appetite, even though its peers are weakening. In the short term, GBP is considered to be more focused on data and responds optimistically. The pound's next catalyst will be the BoE's monetary policy next month.
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