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A half-point interest rate hike from the Bank of England could be on the table after U.K. consumer prices rose a hotter-than-expected 8.7% in May, disappointing economists’ expectations for an ease to 8.4%.
Data from the Office for National Statistics released on Wednesday also showed core inflation, which strips out volatile food and energy prices, climbing 7.1% on an annual basis, against an expected 6.8% rise. That took annual core inflation to the highest rate since March 1992.
The U.K. statistics office said rising prices for air travel, recreational and cultural goods and services, and second-hand cars were the biggest contributors to May inflation.
The data comes a day ahead of a Bank of England policy decision. The British pound
GBPUSD,
initially jumped on the news, and was last up 0.18% to $1.2780.
Ahead of the inflation data, the Bank of England was expected to lift interest rates for the 13th consecutive meeting by a quarter-point to 4.75% at its Thursday meeting. Those expectations were firmed up after data released earlier in the week showed a key U.K. mortgage rate topping 6%.
However, the fresh signs of sticky inflation means investors may need to brace for a bigger hike, said some.
“This is a real headache for the Bank of England. There is a sense that the economy is increasingly fragile, financial conditions are tightening, and yet inflation continues to defy expectations. This could put a 0.50% interest rate rise on the table for tomorrow (vs. the 0.25% expected),” said Jonathan Moyes, head of investment research at Wealth Club, in a note.
And should it tighten too much, the central bank risks damaging that fragile economy, said Moyes.
Given core inflation in particular is not falling as fast as expected, the trajectory for interest rates could lead to a peak as high as 6%, added Neil Birrell, chief investment officer at Premier Miton Investors in a note.
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