Home Business Pound sterling slumps after inflation in June comes in below expectations

Pound sterling slumps after inflation in June comes in below expectations

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Inflation in June came in well below market expectations prompting a steep drop in the pound on Wednesday.

The Office for National Statistics reported that consumer price inflation was steady at 2.4 per cent in the month.

City of London analysts had mostly expected it to pick up to 2.6 per cent thanks to higher oil prices.

Subdued price pressures are deemed to make an interest rate hike in August from the Bank of England less likely.

The Bank of England’s Monetary Policy Committee (MPC) has been flaggingunderlying inflationary pressures in the economy, signalling that it will increase the cost of borrowing later this year.

Financial markets had been pricing in a roughly 80 per cent chance of the next rate hike – from 0.5 per cent to 0.75 per cent – coming on 2 August, at the MPC’s next meeting.

Steady price pressure

The pound fell to $1.3014 in the wake of the data on Wednesday, down 0.72 per cent on the day and its lowest level against the dollar in 10 months.

Against the euro sterling was €1.1216, down 0.25 per cent in the day.

“June’s unchanged inflation rate is a huge surprise,” said Tom Stevenson of Fidelity International.

“Faster rising prices would have given the Bank of England cover for an interest rate hike next month. Now it looks odds-on that the MPC will hold fire yet again. That’s particularly the case after yesterday’s wage growth data emerged weaker than expected at 2.5 per cent including bonuses.”

Ten month low

Reuters Eikon

But some analysts thought that an August hike could still go ahead given firmer output data from the ONS since the first quarter’s GDP slump, which prevented a May rate hike.

“We think the Committee still will press ahead and raise rates next month, given the rebound in the activity data. But the probability likely is lower than the 75 per cent chance currently price-in by investors, and markets should be alert for another unscheduled intervention by the Governor,” said Samuel Tombs of Pantheon.

The ONS reported that there was upward pressure on the inflation rate from transport, reflecting higher oil prices. But this was offset by less pressure from food and drink, clothing and footwear and computer games.

Core inflation, which strips out volatile food and energy prices, declined to 1.9 per cent, down from 2.1 per cent previously. Analysts had expected this to rise to 2.2 per cent.

Separately, the ONS reported that factory gate prices were also lower than expected, rising by 3.1 per cent in June, versus expectations of a 3.2 per cent rise, although this was up from 3 per cent in May.

Meanwhile, UK house price growth slowed to 3 per cent in May, down from 3.5 per cent in April.

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