Published On: Tue, Sep 12th, 2017

Pound LIVE updates: Sterling jumps against euro as inflation surges to five-year high

Sterling hit a four week high of 1.11 against the euro on Tuesday, as markets digested the latest inflation figures, ahead of employment data and the September interest rate decision from the Bank of Englad.

Against the US dollar, the pound reached its highest level in a year, at 1.33.

It comes as inflation jumped to 2.9 per cent in August – up from 2.6 per cent in the previous month and higher than forecast – as measured by the Consumer Prices Index (CPI).

Under CPI including housing costs (CPIH), the cost of living reached 2.7 per cent – level not seen since 2012, according to the Office for National Statistics (ONS).

The Bank of England has previously signalled limited tolerance for high inflation and the latest figures could raise the chance of more members voting for an interest rate rise on Thursday.

As well as inflaton, the decision will also be influenced by the latest employment data out on Wednesday. 

Rising wages and low unemployment could signal the economy remains strong and supports the rationale for hiking rates.

The pound would likely see a big jump on Thursday if more than two members of the Bank’s Monetary Policy Committee (MPC) vote for the base rate to rise from its current level of 0.25 per cent.

Inflation had been expected to rise back to 2.8 per cent in August – and the higher than expected reading could be the factor that pushes policymakers into raising the base rate from 0.25 per cent to 0.5 per cent.

Maike Currie, investment director for personal investing at Fidelity International, said: “The tightening squeeze on cash-strapped UK households continues, with August’s inflation figure showing the CPI (Consumer Price Index) climbing to 2.9 per cent, far out-pacing the growth on our pay packets.

“The spike in prices is due to rising prices for clothing and petrol. The holiday season also saw a rise in air fares.

“The thorny issue of inflation will be the driving force behind any rate rise decision on Thursday. 

“Economists have suggested that now is finally the time that the Bank takes a more hawkish turn, after eight and a half years of ultra-loose policy.”

Now markets are awaiting employment data tomorrow, before the outcome of the MPC meeting on Thursday.

Michael Hewson, chief market analyst at CMC Markets UK, added: “It’s set to be a big week for the pound with the release of the latest inflation and wages data, amidst concerns that the recent rise in inflation may yet deliver a final kick to the UK consumer.

“There is evidence that wage growth might well be starting to bottom out, which this week’s numbers might well corroborate further.
“An improvement in wages could well add further weight to the arguments being made by the Bank of England MPC member Michael Saunders and his calls to reverse last year’s emergency rate cut.”

The Government recognised the concerns of families amid the latest inflation figures.

A Treasury spokesman said: “We know some families have concerns with their day to day cost of living.

“That’s why we are boosting take home pay with tax cuts for over 30 million people and a National Living Wage that is giving the lowest earners their fastest pay rise for 20 years.”

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