Persistent UK Inflation– Sterling Update

GBP

The latest UK inflation data has helped to fuel increased market bets that the BoE will be forced into a more aggressive path of rate hikes, as they battle persistent UK inflation. Headline Consumer Price inflation (CPI) remained in double digits during March, with annual prices increasing by 10.1%. Whilst marginally lower than the previous 10.4% reading, the figure was higher than the estimated increase of 9.8%. Britain now holds the title as the only country in western Europe with double-digit inflation. Who needs to win the Eurovision, hey. There was some good news on the inflation front, however, with the latest Producer Price Inflation (PPI) dropping at a faster pace than had been expected during March. Core PPI inflation increased by 8.5% on a yearly basis, down from 10.2%, and below estimates of 9.2%.

Whilst global energy and producer prices have thankfully deteriorated of late, persistently high food price inflation has increased the probability that the BoE will hike UK rates by another 25bps (to 4.5%) during their May meeting, with further hikes beyond May’s meeting now looking more likely, despite a still uncertain outlook for the UK economy. The BoE are far more likely to take future hikes on a meeting-by-meeting approach, as they assess incoming data. On a slightly more positive note, supermarkets have suggested that food price rises will ease soon, as wholesale global prices decline, according to the good folk at the British Retail Consortium. There was also a sharp drop in Retail Sales over the past month, according to data released earlier today. Retail Sales declined by 0.9%, versus 0.5% during March, which could be a sign of a struggling consumer.

GBP/USD has remained close to the recent high at just over 1.2500 for most of this week, fuelled in part by that higher UK inflation. The move came despite a broadly stronger dollar over the period. GBP/EUR is also starting to break higher once again, rallying back over 1.1350, after reaching a short-term base at just below 1.1300, despite a broadly robust Euro (see EUR).

EUR

The latest ECB accounts, which were released yesterday (Thursday), confirmed that the ‘large majority’ of the governing council agreed with Chief Economist Philip Lane’s proposal to raise rates by 50bps, during their most recent meeting. There had been some tension amongst certain members, given the ongoing banking wobbles at the time, with several suggesting that it might be more appropriate to wait for the banking tensions to subside – which they have thankfully done now. The accounts also confirmed that ‘monetary policy still had some way to go to bring inflation down.’

Markets currently therefore expect the ECB to follow on with at least two more 25bps hikes over the coming months, with recent hawkish rhetoric seemingly supporting the move. ECB governing member Klaas Knot suggested in a recent interview that it was ‘too early to talk about a pause in interest rate rises.’ The latest Regional inflation data, also released this week, has shown some moderation, easing to 6.9% in March from 8.5% during February. However, much of the decline can be attributed to a rapid fall in energy prices, with core inflation still frustratingly high.

Much the same as in the UK, persistently higher inflation feeds through to heightened market-implied expectations for future rate hikes, which will then further support ongoing rallies in the currency. On that note, EUR/USD is now edging back towards the recent high around 1.1000.