Pound Gains as U.K. Inflation Seen Boosting BOE Rate Hike Case
(Bloomberg) -- The pound advanced against the dollar for a second day and U.K. government bonds reversed gains after data showed faster-than-forecast inflation, boosting the case for the Bank of England to increase interest rates again this year.
Sterling also snapped a two-day decline versus the euro as annual consumer-price growth held steady at 3 percent in January, compared with the median economist estimate for a slowdown to 2.9 percent. Bank of England Governor Mark Carney said last week that the central bank may need to tighten policy sooner and faster than anticipated, prompting a hawkish repricing of market interest-rate expectations.
“Higher-than-expected inflation supports our view that the BOE may hike already in May, given the central bank’s concerns about inflation,” said Mikael Olai Milhoj, an analyst at Danske Bank A/S. However, “with Brexit negotiations apparently stuck internally in the U.K. for the time being, we see risks moderately skewed to the upside for euro-sterling near term.”
BOE officials have reinforced the view that more rate hikes are coming, with Monetary Policy Committee member Ian McCafferty reiterating on Monday that borrowing costs will likely rise earlier than previously thought. His colleague Gertjan Vlieghe said at a separate event that the U.K. will need a succession of rate increases to stop the economy from overheating. The market is currently pricing about a 75 percent chance of a rate hike in May this year.
The pound gained as much as 0.5 percent to $1.3902, while it climbed 0.1 percent to 88.72 pence per euro. The yield on U.K. 10-year government bonds rose one basis point to 1.61 percent after falling as much as 3 basis points before the inflation data.
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