Sterling extended its gains against the dollar after a much higher than expected inflation reading fuelled expectations of an interest rate hike from the Bank of England.
The December Inflation Report came in at 3.7%, far higher than the expected 3.4%. Rising commodity (specifically food and fuel) prices are thought to be the main drivers behind the surge. These results show the largest rise between November and December in history. Further upward pressure is expected next month as the January figure will show the preliminary effects of the 2.5% rise in VAT. If the Core Price Index (CPI) continues to rise at a similar rate, the BoE will be forced to raise interest rates, perhaps as early as May.
Focus will now shift to next week’s BoE Monetary Policy Committee meeting minutes to see if other policy members have joined the hawkish sentiments of Andrew Sentence in calling for a rate rise.
The euro has also pushed over 1% higher against the greenback after economic confidence figures came in considerably higher than expected. Also, reports of investors from the Middle East and Russia buying eurozone debt have helped to send the single currency higher. However, speculation that the EU’s policy makers plans to stop the crisis from deepening are working are premature, if not pre-glint-in-the-milkman’s-eye. The true depths of the debt crisis have not been realised and national plans to cut deficits are lightweight at best. There could still be a long way to go in this saga. Don’t forget that it was not until May 2010 that the Greek tragedy unfolded. Expect to see a couple of unanticipated events this year.
When should Merv and the boys increase interest rates and by how much? Any thoughts or questions, please feel free to post below.
Tom Hampton
Analyst – Caxton FX
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