Sterling jumps as inflation backs BoE rate hike bets

LONDON: The pound climbed to a one-week high versus the U.S. dollar and a 21-month peak against the euro on Wednesday after data showed UK inflation surged to a 10-year high last month, backing expectations of an interest rate hike as early as next month.

The Bank of England is expected to become the first major central bank to raise rates since the coronavirus pandemic rocked the global economy with markets pricing a 60% chance this will happen at a Dec. 16 meeting. On Tuesday, data showed Britain’s job market withstood the end of the government’s furlough scheme, easing a major concern about the risks of tightening monetary policy.

For Kit Juckes, a foreign exchange analyst at Societe Generale, consumer prices rising by 4.2% in annual terms in October, well above the BoE’s 2% inflation target, ticks another box for policy makers to go ahead with a hike.

“I’m guessing that the majority (of BoE policy makers) saw enough in this month’s labour market” data to move forward, he argued.

Adding to inflation fears, additional data showed British house prices in September were 11.8% higher than a year earlier.

On Monday, BoE Governor Andrew Bailey said he was “very uneasy” about the inflation outlook but some investors remained cautious over calling the central bank’s next move after it surprised markets by keeping rates on hold earlier this month.

“Unreliableness breeds uncertainty even when it seems obvious”, commented Neil Wilson, an analyst at Markets.com.

The British currency hit a high unseen since February 2020 against the euro and a Nov. 10 high against the dollar after the data was released and held most of the gains by midday.

At 1217 GMT, sterling traded up 0.31% against the dollar at $1.3468 and was rising 0.2% against the euro at 0.8411 pence.

Fears of a trade war with European Union have also being weighing on the pound.

British Brexit minister David Frost said on Wednesday that his government’s preference was to strike a deal to improve post-Brexit trade arrangements for Northern Ireland and that the agreement can be reached by Christmas.

Britain left the EU last year, but has since put off implementing some of the border checks between its province of Northern Ireland and the rest of the United Kingdom that the bloc says London is obliged to make under the departure deal.