PoundSterlingLIVE - The British Pound rose across the board after UK inflation for December rose by more than expected, leading markets to cool expectations for imminent Bank of England interest rate cuts.
Markets were positioned for the Bank to cut rates as soon as March, but the ONS reported headline CPI inflation increased from 3.9% in November to 4.0% year-on-year in December, beating consensus expectations for another fall to 3.8%.
The rise was helped by a 0.4% month-on-month increase from -0.2% previously, which was stronger than the 0.2% rise the market expected.
Core inflation rose 5.1% y/y in December, unchanged on the previous month and exceeding estimates of 4.9%. This was driven by a m/m increase of 0.6%, up from -0.3% and ahead of consensus expectations for 0.4%.
The inflation data suggests market expectations for Bank of England rate cuts would need to retreat, which can support UK bond yields and the Pound.
The GBP/EUR exchange rate rose in the minutes following the release to print at 1.1630, and the Pound to Dollar exchange rate rose 0.3% in the minutes following the release to 1.2633.
"Though this increase does not take the figure drastically higher, it shows that the UK’s battle against inflation is not yet over and the situation remains precarious," says Richard Carter, head of fixed interest research at Quilter (LON:QLT) Cheviot.
Expectations for a low print were boosted by a number of economic predictions made over the past week that UK inflation would fall back to the 2.0% target as early as April.
Indeed, trends of late - recall October and November's bigger-than-expected falls - suggested inflation was on course to reach this destination.
The Bank of England has nevertheless cautioned against complacency, and today's surprisingly hot figure will justify the Bank's preferred stance to keep rates level for an extended period.
"Not only has the headline rate of inflation seen an unwanted uptick, but Core CPI (excluding energy, food, alcohol and tobacco) still remains relatively high. Core inflation has been falling much more gradually than the headline figure and now sits at 5.1%, holding steady at the same rate as November. Progress here is likely to be slow, so the Bank may resist making rate cuts until it returns to a more palatable level," says Carter.
The Pound has been one of 2024's better-performing major currencies, helped by a firming in UK interest rate cut expectations.
These inflation data will add to expectations that the Bank won't be able to cut rates as aggressively as market expectations had signalled, offering further support to the currency.
"Pretty comfortable with my call for August for the first cut in UK bank rate. CPI was never likely to slow in a straight line - & April indexation event still to navigate. Market pricing for an early Spring cut will drift on this data," says Simon French, Chief Economist at Panmure Gordon.
An original version of this article can be viewed at Pound Sterling Live