By Amanda Cooper
LONDON, March 22 (Reuters) - Bank of England
policymakers will not have looked at Wednesday's inflation data
with the same enthusiasm as sterling traders, who took advantage
of a shock jump to push the pound up, confident that a rate hike
this week is now a done deal.
British consumer price inflation (CPI) rose to 10.4% in
February from January's 10.1%, above all economists' forecasts
in a Reuters poll and almost back to where it was in December.
Markets now see a near 100% chance of the BoE raising rates
to 4.25% from 4.0% on Thursday, firming from a roughly 50/50
chance earlier this week of policymakers doing nothing in light
of the crisis of confidence that has rocked the global banking
sector. The rally in sterling, last up 0.45% at $1.227 , and
a 25 basis point jump in two-year government bond yields were further signs that investors now expect an
imminent hike.
While a fall in energy prices is positive in the longer run,
prices elsewhere have risen. The problem, said Ben Nicholl, a
fund manager at Royal London Asset Management, is "inflation in
all the wrong places".
Core inflation, which strips out food and energy, rose by
6.2% in February, far above the median forecast of an easing to
5.7% in the Reuters poll.
"Core CPI missed by 0.5% - that's one of the biggest, if not
the biggest misses on CPI in the recent series of inflation
data. So it's a shocker for the Bank of England, particularly
given they've been so dovish in their recent messaging," Nicholl
said.
The cost of food and non-alcoholic drinks rose 18.0% - the
most in more than 45 years, while the 12.1% annual rise in
inflation at restaurants and hotels was the biggest since 1991,
according to Japanese bank Nomura.
Britain has had the highest inflation among Group of Seven
nations with persistent price pressures affecting longer-lasting
components such as services and wage growth.
"The UK will be obliged to continue to hike rates," Francois
Savary, chief investment officer at Prime Partners, said.
"They are in the worst situation you can find among
developed economies. The UK has a significant inflation issue
and growth has not returned to pre-pandemic levels," he said.
WHAT GOES UP
Britain's two-year gilt yield shot up to 3.5%,
set for its biggest one-day jump since October when Britain's
financial markets were reeling from former Prime Minister Liz
Truss' "mini-budget".
That reflects investors' belief that rates still have room
to rise, even if the UK's independent watchdog last week
forecast inflation will drop towards 3% by year-end.
Rate futures indicate the Bank Rate peaking at 4.5% or 4.75%
in mid-2023 but little chance of it hitting 5% as had been the
case earlier this month.
UK mid-cap stocks , closely linked to the health of
the underlying economy, were among the poorest performers in the
European equity market on Wednesday, dropping 0.4% while the
regional STOXX 600 rose 0.3% .
At above 10%, the UK's rate of inflation is more than five
times the BoE's target rate of 2%.
City Index markets strategist Fiona Cincotta said rate-hike
speculation was supportive for the pound, which was also 0.2%
higher against the euro at 87.98 pence.
"The market is going to be second-guessing (the BoE) right
now - it's difficult to assume there's just one more rate hike
left in the tank," she said.
RLAM's Nicholl noted recent data, such as employment,
business activity and manufacturing, had shown strength, and
consumer spending has held up.
Derek Halpenny, EMEA head of research for global markets at
Nomura said January and February's combined annual inflation
rate of 9.67% makes for a "mildly supportive" outlook for the
pound.
"Prior to the banking sector turmoil, we had assumed the BoE
would hike by one further 25bps to 4.25% as an insurance. After
today’s data we think that is now likely, but still assume 4.25%
will be the peak given the sharp declines in year-on-year CPI
remain likely in Q2 and beyond," he said.
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BREAKINGVIEWS-BoE’s inflation pickle can taste sweet in Britain ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Additional reporting by Dhara Ranasinghe; Editing by Kirsten
Donovan)
