Rising inflation to justify hawkish bias at the BoE meeting

Rising inflation to justify hawkish bias at the BoE meeting

Rising inflation to justify hawkish bias at the BoE meeting

Britain's unemployment rate hit its lowest since 1975 but wages slipped further behind the cost of living, taking some of the urgency out of a Bank of England debate on when interest rates might rise.

The Pound jumped above the 1.33 mark to its strongest position in a year against the US Dollar on Wednesday morning after yesterday's inflation data suggested that the Bank of England could raise interest rates sooner than the bulk of the market had anticipated.

According to data released by the Office for National Statistics (ONS) on Tuesday (12 September), inflation as measured by the Consumer Price Index (CPI) rose 2.9% year-on-year last month, compared with the 2.6% growth recorded in July, and above and analysts' expectations for a 2.8% reading. The institution is also reticent to tighten too quickly in case the Brexit process continues to depress United Kingdom growth.

That took the jobless rate further below the 4.5 per cent level which the BoE has said would probably force employers to step up their pay increases to hire staff.

It was also 0.1 percent higher at 89.92 pence per euro and at its highest in six weeks on a trade-weighted basis.

The dollar is also trailing behind the pound as huge United Kingdom inflation took a sharp turn, and now investors are betting that the Bank of England is going to increases interest rate this year, just before 2018. That, incidentally, could help deliver what the bank wants as a higher pound could start to dampen down inflationary pressures in the British economy by making imports cheaper.

The UK's central bank kept its key interest rate on hold as expected, although two members of its monetary policy committee voted in favour of a 0.25 percentage point rise.

Whatever the outcome all eyes will now be on the BoE ahead of its latest monetary policy meeting later this week as investors look to the bank to see what moves it will make in order to prevent household finances from deteriorating any further.

"Inflation has been steadily rising in the United Kingdom and the latest forecast suggests this trend is continuing", analysts from retail broker FxPro said in a morning note.

"With markets still mostly disregarding early rate hikes, stronger hawkish rhetoric than expected could underpin sterling rates, and the currency". The median forecast had been for a slightly softer 2.8% y/y reading.

It says the immediate surge in inflation above its target is due to the fall in the pound after the Brexit vote.

The BoE faces the dilemma of having to balance weak wage growth, slower economic activity this year and big questions about what Brexit will mean for the economy with above-target inflation.

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