UK core inflation hits highest levels in decades

Markets await the Bank of England's decision tomorrow

By Laila Eid | @Laila Eid | 21 June 2023

20 June _ UK CPI-20230615-133925
  • Yesterday, British pound declined for the second consecutive day

  • British Pound has shown strong performance over the past three weeks

  • The current interest rate in the UK is 4.50%

Rising inflation puts pressure on Bank of England

This morning, the UK Consumer Price Index (CPI) was released, indicating that UK inflation stabilized at 8.7% in May. However, the Office for National Statistics had predicted a decline in the year-on-year index to 8.4%. Additionally, the core inflation index rose to its highest level since 1992, reaching 7.1% on an annual basis. This increase was unexpected as there were anticipations for the index to stabilize at 6.8%. Furthermore, inflation on a monthly basis saw a 0.7% increase.

These latest figures have raised the possibility that the Bank of England will continue its interest rate hike and monetary tightening policy, which is currently the fastest in four decades. The sudden rise in core inflation is expected to influence the upcoming Bank of England decision. Market expectations indicate that the interest rate will be raised by 25 basis points, reaching 4.75%. Consequently, the central bank's messaging is likely to adopt a more hawkish tone.

The current market consensus is that the British interest rate will reach 6% by December 2023, which would be the highest since 2001. Moreover, it is expected to rise further to 6.25% by February 2024, reaching levels not seen since 1998.

During yesterday's trading session, Treasury yields for 10 years experienced a decline, closing at 4.32%. On the other hand, the bond yields for two years closed near 4.94%, resulting in a 60-basis point difference. This gap is the largest recorded since 2000, indicating increased market concern regarding the British economy.

Pound sterling reacts to UK consumer price index

Following the release of the British Consumer Price Index reading, the pound sterling initially rose slightly against the US dollar, reaching 1.2801 level. However, it later fell to 1.2690.

Last week, the pound sterling had reached its highest level this year at 1.2850. Currently, the markets, particularly with regard to the pound sterling, are eagerly awaiting the decision of the Bank of England.