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Pound takes off after inflation figures support BoE’s hawks

Super, soaraway sterling – at least for now…

The pound is on course for one of its best days of the year after inflation data came in ahead of forecasts , offering succor to the more hawkish members of the Bank of England’s finely-balanced Monetary Policy Committee, which meets this week.

Sterling is up 0.9 per cent at $1.3277 after the data, its highest level against the dollar since September 2016.

Against the euro, it strengthened by 0.6 per cent with £0.9012 required for a unit of the shared currency, also its strongest intraday level since August 4.

Speaking before the inflation numbers came out, Geoff Yu, head of UBS Wealth Management’s UK Investment office said the data “could be the last stand to keep any hawkishness alive, not just for this week but for the rest of the year as the market’s base case is for no tightening this year”.

It looks like the 2.9 per cent, year-on-year rise in the consumer price index of 2.9 per cent has done exactly that, at least in the short term.

But as Ben Brettell, senior economist at Hargreaves Lansdown, points out:

It looks likely that inflation will fall back in the coming months, as the effect of Brexit-induced sterling weakness falls out of the year-on-year calculation. Indeed it’s possible that 2.9% will be the highest we see in the current cycle. Mark Carney will certainly be hoping so, as it will save him the trouble of writing to the chancellor to explain himself.

Beyond the currency effect there appear to be few underlying inflationary pressures. Labour costs are the main factor in domestic inflation, and growth here remains below long-term averages. Productivity growth is sluggish, and technological changes look to be suppressing wages.

All this means less pressure on the Bank of England to consider raising interest rates, and will allow the MPC to remove the sticking plaster of ultra-low interest rates as slowly as they like. Rates are a racing certainty to be left on hold at this week’s meeting, but as ever the minutes will be closely scrutinised for clues as to committee members’ latest thoughts.

Robert Wood, UK economist at Bank of America Merrill Lynch, now expects “a more hawkish BoE statement after Thursday’s policy meeting,” adding:

We expect the statement to say the policy decision is finely balanced for a number of rate setters and to argue the market is underpricing the chances of a rate hike. But we do not expect a change in voting pattern this month, looking for a 7-2 vote to keep rates on hold with new MPC member David Ramsden siding with the dovish camp. We do not expect Andy Haldane to change his vote, but he is the one to watch.