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Wednesday, 22 March 2017

Sterling hits three-week high as UK inflation passes BoE target


Sterling jumped almost 1 percent to its highest level in three weeks on Tuesday, after data showed British inflation in February above the Bank of England's 2 percent target for the first time since the end of 2013.

Consumer prices rose by a stronger-than-expected 2.3 percent in annual terms, beating expectations of a 2.1 percent rise, and up sharply from 1.8 percent in January, the Office for National Statistics said.

Strong consumer spending was behind the UK economy's surprising resilience in the months immediately following Britain's unexpected vote last June to leave the European Union.

However, a plunge in the pound, which has wiped almost a fifth off its value against the dollar since the vote, has driven a rise in domestic inflation. A recent run of consumer data has shown that is beginning to weigh, with Britons less ready to spend on non-essential items.

Sterling, which had already been trading up 0.4 percent at $1.2416 before the data, rose to a high of $1.2472 - its highest since Feb. 27 - after it, up 0.9 percent on the day.

It also hit a two-day high of 86.55 pence per euro.

"The way the market is treating the data is obviously quite conventionally at the moment - that higher inflation implies greater risk of a rate hike ... and that's being taken as an immediate positive for sterling," said RBC Capital Markets currency strategist Adam Cole.

"Longer term I'm not sure that that is a particularly robust relationship when inflation is rising but wages aren't, and the net effect will be to squeeze real incomes and clamp down on consumer spending as a result."

Britain's unemployment rate fell unexpectedly to its lowest in more than a decade in the three months to January, but pay growth - an indicator the BoE is watching closely as it considers its monetary policy - worsened, in an unpromising sign for the economy ahead of its divorce with the EU.

The BoE surprised markets last week when one of its policymakers voted to lift interest rates, in a break with the consensus of keeping rates at a record low.

Some other members of the Bank's monetary policy committee also gave a hawkish tilt to the Bank's rhetoric, saying it would not take much for them to follow suit if inflation continued to shoot up.

"The print at 2.3 percent this morning...(leads) us to believe a rate hike to curb inflation could be on the table sooner than first-thought," said Alex Lydall, head of dealing at Foenix Partners in London.

Reference: Ritvik Carvalho

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