Tuesday 17 January 2017

Pound Sterling Spikes Amid Fears Of Shocking Interest Rate Rise

Pound Sterling

The sudden December jump in the Consumer Prices Index to 1.6%, much higher than expected, sent tremors through currency markets.

Sterling jumped more than a cent against the dollar, hitting $1.2189 at one point, in another volatile session.

The latest evidence of Brexit-inspired inflation came hours after Bank of England Governor Mark Carney stressed limits on the inflation Threadneedle Street would tolerate.

Interest rates could move in “either direction” after being slashed to 0.25% in the aftermath of the referendum.

Carney and his rate-setting colleagues are also focused on soaring consumer credit levels as households ignore Brexit.

“Today’s data will further fuel suspicions that the next move in interest rates could be an increase,” Markit chief economist Chris Williamson said. The Bank forecast in November that inflation will hit 2.7% by the end of this year but many experts say the cost of living could be above 3% by the summer.

The inflation figures caused yet another spasm in currency markets as Prime Minister Theresa May set out more details on her strategy for Brexit in a speech today. Worries over a hard Brexit pushed the pound to lows not seen since 1985 in the previous session.

The Office for National Statistics said “the majority of the broad groups of goods and services made an upward contribution” to inflation in December, which is at the highest level since July 2014 and closing in rapidly on the monetary policy committee’s 2% target.

Air fares and food prices were the main drivers behind the rise in the cost of living, while petrol prices also fell far less sharply than last year.

Figures published alongside the CPI also stressed the growing pressure on businesses, thanks to weak sterling and higher oil prices.

Input costs jumped 15.8% in the year to December, compared with just a 2.7% rise in factory gate prices, hammering manufacturers’ margins. Input prices rose 1.8% in December alone while selling prices were virtually flat.

George Nikolaidis, senior economist at the EEF manufacturers’ organisation, said: “Any respite is unlikely during 2017 as increased input costs will continue to bite into profit margins in the year ahead. Manufacturers will employ a range of strategies to counter this drag but, with some of these costs already being passed on to consumers as CPI inflation rose to a two-year high, worries about the strength of household spending this year look to be well justified.”


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