Sterling Strengthens, UK CPI at 3.8% Fuels Expectations for BoE to Remain Cautious
The pound sterling strengthened against most major currencies on Wednesday after UK headline inflation rose 3.8% year-on-year in July, beating the 3.7% forecast and higher than the 3.6% in June. The stronger-than-expected ONS data immediately attracted buying interest in GBP, as it was seen as reducing the Bank of England's (BoE) room for aggressive policy easing.
The details were also strong: core CPI—which excludes food, energy, alcohol, and tobacco—rose 3.8% year-on-year (vs. the 3.7% expected). On a monthly basis, CPI was +0.1% month-on-month, against the projected deflation of -0.1%. Services inflation—a closely watched component by policymakers—jumped to 5.0% year-on-year from 4.7%, indicating persistent domestic price pressures.
Policy-wise, these results are in line with the BoE's guidance for "gradual and cautious" easing. At its August meeting, the Bank of England (BoE) cut interest rates by 25 basis points to 4.0% by a narrow majority, while Governor Andrew Bailey warned that consumer inflation expectations were beginning to unravel amid rising food and energy prices. The BoE also raised its one-year CPI forecast to 2.7% from 2.4%.
Looking ahead, the market—referring to a Reuters poll from August 13–19—expects only one more rate cut by the end of the year. With services inflation still high and core CPI above target, the pace of rate cuts is expected to be limited, potentially supporting the GBP; however, a rapid easing if price and labor market data cools could reverse Sterling's gains. (ayu)
Source: Newsmaker.id
