Bank of England open to 50bp hike as UK inflation hits 9.4%

Daily Currency Update

This morning saw UK inflation hit another multi-decade high as the Consumer Price Index came in at 9.4% y/y, higher than most analysts had forecast. The accompanying information, published by the Office of National Statistics that compiles the data, showed that the biggest upward contribution to inflation came from fuel and food costs, as prices at the pump remain around £2 a litre. Shortages of grain and pipeline constraints see supermarket prices continue to trend higher.

It should be noted that the pace of price rises has moderated over recent months, however the Bank of England is still predicting double-digit inflation before too long, a situation the UK hasn't found itself in since the early 1980s. In a speech at Mansion House in London yesterday, the Bank of England Governor said that an unprecedented 50bp hike was "on the table" at its next monetary policy decision, which is due August 4th.

The usual jump in a currencies value has failed to materialise on the back of Baileys comments and above target inflation print, as the UK economic outlook is looking pretty gloomy. A lot of the inflation the UK is experiencing is imported. UK consumers can't control the international price of oil, gas, and the shortage of grain being seen at the moment. Therefore, hiking borrowing costs in the face of rising prices whilst the economy slows is a far from ideal situation, however one that has to be addressed even if it risks putting the UK economy into recession. On the back of this, GBP/USD, which was around the 1.2030 mark before the CPI release, is now back under 1.20. GBP/EUR is a little lower at 1.1725.