Is The BoE Prepared To Step Up Its Inflation Fight In Light Of Another Devastating Inflation Report?

Republished By Plato

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Policymakers at the Bank of England will be scratching their heads this morning wondering what they have to do to get inflation down, with the latest CPI report another setback in the central bank’s ambition of delivering price stability and a soft landing.

While there are many reasons to be confident that inflation should fall sharply over the coming months including lower energy and food price contributions, it’s hard to be too optimistic when the data keeps consistently coming in well above forecasts.

There is clearly immense stubbornness in the UK inflation numbers and the fact that the core also unexpectedly rose yet again by another 0.3% will be a huge concern to the BoE. Services inflation was always going to take longer to regain control of and today’s data once again suggests momentum is strong here.

Market interest rate expectations are continuing to fluctuate after the release but there’s clearly now a much stronger case for a 50 basis point hike tomorrow, which would take Bank Rate to 5%. What’s more, markets now see it reaching 6% early next year which could be very damaging and increases the risk of the economy buckling under the pressure.

The pound initially spiked after the release, hitting 1.28 against the dollar before giving around half of that back. Higher interest rates for longer against the backdrop of a more resilient economy may remain supportive for the pound for now but as soon as the economy starts to buckle, traders may be forced to rethink.

GBP/USD Technical

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Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.