GBP recovered and attracted investor interest after the release of the United Kingdom’s ONS report on inflation. Inflation in September came in hotter than expected and pushed the GBP/USD and GBP/EUR higher. The belief is that stubborn inflation will increase the chances of further Bank of England (BoE) policy-tightening in the next monetary policy meeting in November.
The elevated Consumer Price Index (CPI) could increase uncertainty and cast doubt on UK Prime Minister Rishi Sunak’s pledge to halve inflation to 5.5% by the year-end. The impact of high inflationary pressures is expected to further weaken the UK’s housing sector which has struggled due to higher borrowing costs.
UK headline inflation came in higher by 6.7% year-on-year in September, the same as in August, but above the market consensus of 6.6%. The month-on-month figure rose to 0.5% from 0.3%, which met expectations.Core CPI inflation rose by 6.1% y/y in September, lower than the previous 6.2%, but higher than the anticipated 6.0% reading.
Another rate hike by the BoE?
Some economists have argued that the inflation release will not convince the BoE that another rate hike is needed in November, especially after Tuesday’s wage numbers that showed that wage pressures are easing off, which can help lower inflation rates in the future.
While the pound to euro exchange rate, and the pound to dollar exchange rate were both slightly higher after the inflation release, the pound has since then remained flat against both of its rivals. Economists have argued that the pound will remain under pressure against the euro, greenback and other major currencies despite hotter than expected inflation figures.
Yesterday, the pound weakened against major currencies following the wage figures, which has led some analysts to believe that the market may have already moved past the inflation release. As some have argued, the market is now reacting to data which reflects the view that the BoE has paused its rate hiking cycle. Some believe that the Bank of England will possibly prefer to wait and see and avoid taking further action. An important contribution to inflation has to do with rising fuel costs and increasing global oil prices. Once these begin to decrease, inflation will also begin to drop.
As Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics explained, “the combination of falling energy costs for many businesses when they renew their contracts with suppliers and improving labour availability should ensure that services price rises continue to slow.” Pantheon Macroeconomics continues to anticipate a slight increase in consumer prices over the coming months which will bring the headline rate of CPI inflation down to around 4.5% in Q4 and 4.0% in Q1. For the rest of 2024, they expect the headline inflation rate to linger between 2.0% and 3.0%. As Tombs recognised, the Monetary Policy Committee won’t need to leave the Bank Rate at 5.25% for a long period in 2024.