Data this morning has revealed a rise in consumer prices, with the UK rate of inflation moving to 3.4% in March.
Market forecasts had expected a more modest rise of just 3.2%. Higher import prices, and the rising price of energy have kept upward pressure on inflation. The figure remains some way above the Bank of England’s 2.0% target, and Governor Mervyn King will again have to write a letter to Chancellor Alistair Darling explaining the rise. The Bank has forecast that the rate will fall back over the medium term. The bigger picture is that the high degree of spare capacity in the economy will drag on overall price pressures.
Duncan Higgins, senior analyst at Caxton FX comments, “The comparative weakness of the pound is continuing to push up the cost of imports, adding to inflationary pressures. The market is expecting the rate to fall as the year wears on, though the argument for raising interest rates will soon begin to build should inflation fail to slow.”
The pound briefly bounced in the wake of the news, but slipped back to pre-data trading levels as rumours beforehand had anticipated a higher figure. Currently sterling is holding just below €1.14 against the euro and is up around half a cent against the dollar, with the price hovering near $1.54.
“Any true upward momentum for the pound will be tough to come by with a range of figures this week still to be released, including first quarter economic growth. Market focus is also turned to the next leaders debate. Following the reaction seen in the polls previously, investors will be cautious of taking sterling too high ahead of Thursday evening,” continues Higgins.
