UK CPI Sets Up More Hiking By the BOE

Inflation in the UK stays in double digits for the seventh consecutive month, giving impetus to expectations the BOE will keep hiking after the next meeting.

Expectations Near Unanimous

March UK CPI rose 0.7% in March, contributing to a 10.1% annual rate, down from the 10.4% registered in February. That compares to the 10.2% expected. But what affected the markets the most was core inflation coming above expectations and unchanged at 6.2% annually, compared to the 6.0% expected. The initial jump in the pound faded relatively quickly, but the cable ended the session higher.

As recently as the start of this month, markets were pricing in just one more rate hike to 4.5%, expecting the BOE to hold rates steady through the summer. But now the market is pricing in more action from the BOE. The consensus now is that there is a 98.2% chance of a quarter-point rate hike at the next meeting, with markets expecting a peak rate of 5.0%, potentially to be achieved as late as November.

Inflation Must Come Down Next Month

While double-digit inflation is worrisome, repeating a similar rate next month would require something extraordinary. This is because of "base effects" The inflation rate is compared to the prior year, and by April 2022, inflation was already rising at an accelerating rate. April of last year saw a 2.5% monthly increase in inflation as the initial effects of the war in Ukraine took its toll on energy prices.

For inflation to continue to rise at the 10.1% rate in March, there would have to have been at least 2.5% inflation in April of 2023. That has only happened once since records began, and it was last year. Besides that, the largest increase in inflation was 2.0% in October of 2022, which was also the result of Ofgem energy price cap changes. The BOE will consider that at the meeting and not be under as much pressure to raise rates as the markets might suggest.

Pound Setting Itself Up for Consolidation

Cable declined to the $1.2350 handle on Monday, forming a double bottom with last Monday’s support. Despite the preceding leg spiking above the peak of $1.2523, the pair appears to be setting up a potential sideways market.

Prices reside around the middle of the range after rising in the aftermath of the CPI report and could go either way from here. A break of the lower end would expose $1.2276 and $1.2222, whereas, on the flip side, bulls face $1.2600 and $1.2658, implying upside momentum might lag around the former resistance level.

KEY takeaways

UK inflation increased for the seventh consecutive month, expected to lead to further interest rate hikes. The market consensus is a 98.2% chance of a quarter-point rate hike, with a peak rate of 5.0%. While double-digit inflation is concerning, it is unlikely to rise at the same rate next month due to "base effects". The pound is setting up for consolidation, with prices in the middle of the range post-CPI. A break of the lower end would expose $1.2276 and $1.2222, whereas bullish momentum might lag around $1.2600.