The Bank of England voted to keep interest rates on hold at 0.5 percent last week but after inflation data released today it seems as though a rate hike by the central bank may not be too far off.
Even before today’s data, the BOE warned that it might have to lift rates sooner than expected on the back of stubbornly high inflation
"Monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report," the bank said.
Today’s release shows inflation in the UK sits at 3 percent, which is really starting to hit the economy in the UK as wage growth remains stagnant which has eroded the purchasing power of consumers.
By lifting rates, the BOE hopes to bring down inflation to around 2 percent by the end of the year but some fear as expectations grow of more aggressive rate hikes, the sterling may rise further, well before the rate rises take effect which may exempt the need to implement consecutive rate hikes.
"Markets had moved quickly this year to discount more tightening from the BoE. The hawkish tilt of this meeting will at the very least, vindicate these moves and possibly encourage further expectations. Said Michael Metcalfe, global head of macro strategy at State Street Global Markets
“What will be key now is to watch how sterling responds, as a much quicker appreciation could produce a faster fall in inflation and potentially nullify the need for a more rapid tightening cycle." He added.
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