Consumer inflation in the United Kingdom reached 8.7% per annum in May, according to official figures, which was higher than the predicted growth of 8.4% but at the same level as in April (8.7%). On the other hand, core inflation, which excludes changes in the cost of food, energy, alcohol, and cigarettes, increased by 7.1%, which was higher than the anticipated level of 6.8%.
The Bank of England will have to consider hiking interest rates later this week as a result of this. However, the percentage increase is projected to be small. Slower economic growth and a higher recession risk may result from tighter monetary policy.
This week was the first time in 15 years that yields on 2-year government bonds, which are especially sensitive to interest rate and inflation expectations, reached 5%. The market fall in September that was blamed on former prime minister Liz Truss's intentions to boost lending came flooding back.
It's possible that this could encourage overseas investors to purchase sterling-denominated assets in the hopes of earning a better rate of return. However, such trade may lose steam if inflation strengthens and the central bank is unable to hike rates sufficiently to restrain it.
The revaluation of assets has reached its greatest level since 2007-2008, which analysts believe is mostly responsible for the recent rise in the value of the pound. Carry trade, which refers to making money off of the difference between two different interest rates, is another factor.
On Thursday, it is anticipated that the Bank of England will raise interest rates by 25 basis points, bringing the total to 4.75%. On the other hand, after the publication of the inflation statistics, the money markets showed that traders are now expecting that there is a roughly 50% possibility of a 0.5 point rate hike, which is an increase from the previous estimate of 25%.
This means the concerns about inflation's potential impact on the economy and the Bank of England's limited power to curb inflation are on the rise.
According to a statement released by the European Central Bank, the decision to hike interest rates is having a gradual influence on financial conditions as well as the broader economy.
Such contradictory reasons create grounds for differing opinions inside the Governing Council of the ECB. There are strong proponents of future rate hikes, and there are backers of pausing the tightening of monetary policy.
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