UK inflation to soon top seven percent

GBP

The pound remained highly volatile on Thursday as the Bank of England decided to raise interest rates to 0.5%. Half of the BoE policy makers wanted a bigger increase to contain rampant price pressures. The central bank warned inflation will soon top 7%. In a surprise split decision, four of the nine members of the Monetary Policy Committee wanted to raise interest rates by half a percentage point to 0.75%. This would have been the biggest increase in borrowing costs since the BoE became operationally independent 25 years ago. The majority, including Governor Andrew Bailey, voted for a 0.25 percentage point increase.

The BoE said consumer price inflation – which stood at 5.4% in December – now looks set to peak at around 7.25% in April, which would be the highest rate since the recession-ravaged early 1990’s and miles off its 2% target. If inflation continues to rise then the BoE have not ruled out further tightening of monetary policy to contain price pressures.

Lastly Governor Bailey stated that the outlook remains uncertain and warned it would be a mistake to assume interest rates are on an “inevitable long march up”. He appeared keen to quell the market’s hawkish expectations further by saying rates were not rising because the economy “is roaring away”. Bailey’s comments are supported by the impact of rising energy prices and inflation could have on consumer spending in coming months, fearing they will act as a headwind to growth. However with interest rates rising again this could cause price pressures to diminish.

EUR

The euro rallied to three week highs against the dollar. Comments from European Central Bank President Christine Lagarde fuelled expectations of faster policy tightening, as she focused on the prospect of eurozone inflation overshooting. Lagarde acknowledged on Thursday that eurozone inflation was running hotter than expected, with risks tilted to the upside. She also said the ECB, which left policy rates unchanged at Thursday’s meeting, would not rush into new moves.

When Lagarde was asked about a interest rate hike she stated that the eurozone would assess conditions very carefully and be “data-dependent”. As a result, the euro strengthened greatly across the board as money markets are now pricing in an 80% chance of a 10 basis-point hike in June and an almost 100% chance of 40 bps of hikes by year end.

Key announcements

12:15 – GBP – MPC Member Broadbent speaks
13:30 – USD – Average Hourly Earnings m/m – Forecast at 0.5% from previous 0.6%
13:30 – USD – Non-Farm payrolls – Forecast at 110k from previous 199k
13:30 – USD – Unemployment rate – expected to remain unchanged at 3.9%