The pound surged to its highest level against the dollar in around one year on Tuesday after figures showed that UK inflation returned to its highest level in years, potentially piling pressure on the Bank of England to raise interest rates soon.
Official data showed that inflation surged to 2.9 per cent in August, beating estimates and massively overshooting the Bank of England’s 2 per cent target. It hit the same level in May and previously hadn't been this high since June 2013. The pound was trading around $1.327 immediately after the release – its highest level since September 2016. It rose to just below €1.109 against the euro, a level last seen in early August.
“The larger-than-expected rise in UK inflation in August has thrown the spotlight back on the UK interest rate debate,” said Adam Chester, head of economics at Lloyds Bank’s commercial banking arm.
“The Bank of England meets this Thursday to set monetary policy. Judging by last month’s vote, two members of the Committee are already minted to support an immediate rise in interest rates. It will be interesting to see whether any other members may do likewise given today’s reading.
“On balance, we think that Brexit uncertainty will continue to trump inflation concerns, and rates will remain on hold for now - but the risks are shifting," he said.
The pound suffered a pummelling in the aftermath of last June’s Brexit vote and still remains more than 10 per cent lower against the dollar since then.
In recent weeks it has fallen against the euro, inching closer to parity, though that’s largely been a function of the strength of the trading bloc’s currency.
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