Another ugly UK inflation print that not only guarantees at least a 25bp rate hike from the Bank of England on Thursday, but all but ensures that the tone of the MPC's communications will be hawkish. While headline inflation has clearly peaked, this is largely to do with the base effect following the increase in household energy bills last year.
According to Ebury, in a monthly basis, prices are continuing to run hot, and once again exceeded expectations (+0.7% vs. +0.5% consensus). Of even greater concern will be the unrelenting surge higher in core prices, which broke to a fresh three decade high 7.1%, again comfortably above economist expectations.
The BoE has been backed into a corner, and will have no choice but to continue raising interest rates aggressively in the coming meetings. We now think that one, or perhaps even both, of members Dhingra and Tenreyro will vote for an immediate hike on Thursday, having opted for no change at the past few MPC meetings. We could also see a handful of votes in support of an even larger rate increase, and a 50bp hike is now a very realistic possibility. Indeed, swap markets are currently assigning almost a 50/50 chance of a half a percentage point move in rates this week.
This morning's inflation surprise has provided a bit of assistance to the pound, which is trading just shy of its 14-month highs on the US dollar. Should the Bank of England deliver a jumbo rate hike on Thursday, while indicating that much more needs to be done to rein in UK consumer prices and wages, then expect another fresh move higher in GBP against most currencies.