The pound rose to a fresh three-week high against the dollar on Tuesday after a larger than expected jump in inflation sparked expectations that the Bank of England may raise interest rates sooner than previously forecast.
Sterling was trading at $1.245 on Tuesday afternoon, its highest level against the US currency since late February, after official data showed that consumer price inflation jumped to 2.3 per cent in February, beating the 2.1 per cent City forecast and up from 1.8 per cent in January. It closed higher at $1.247 at market closing time in London.
“The additional upward pressure from the decline in sterling over the past 18 months will push UK inflation up further over the course of this year - to 3 per cent or possibly higher,” said Andrew Sentance, senior economic adviser at PwC and a former member of the Bank of England’s Monetary Policy committee.
He said that “if the economy remains resilient”, the Bank “should be considering a rise in interest rates to counter the surge in inflation".
The Bank surprised markets last week after one of the policymakers, Kristin Forbes, said interest rates may need to rise “soon” to keep a lid on inflation if the UK economy continues its “solid and stable” performance.
Mitul Patel, head of interest rates at Henderson Global Investors also said that the market was bringing forward forecasts of a rise in interest rates as a result of Tuesday's data, but that the MPC is treading a narrow path, “as they assume this period of high inflation will be temporary”.
The pound is still over 15 per cent down on the dollar since last year’s Brexit referendum and remains incredibly volatile, tending to jump or slide on any rhetoric around the nature of Brexit and any economic data providing insight into the state of the economy.
The most recent drop followed the announcement from Downing Street that the UK will trigger Article 50 on 29 March.
A poll of more than 60 banks and research institutions conducted by Reuters that was released earlier this month predicted that there will be no dramatic sterling moves once Article 50 is triggered, however those questioned also do not think that the currency is about to recover sustainably.
Most economists predict the pound will trade at $1.23 against the dollar by the end of June, and drop to $1.21 in the subsequent three to six months.
Some are more pessimistic with analysts at Deutsche Bank predicting in early March that sterling will plunge to $1.14 by the end of June - a new 31-year low for the currency.
