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Pound steadies against dollar and euro as UK inflation hits 40-year high

·Business Reporter, Yahoo Finance UK
·2-min read
EMBARGOED TO 0001 THURSDAY JULY 14 File photo dated 26/01/18 of UK five pound, ten pound, twenty pound and fifty pound notes with one pound coins, as the proportion of children living in families which could not afford essentials fell by a quarter in the six years before the coronavirus pandemic, research suggests.
The pound has stabilised.

The pound managed to stabilise against the dollar (GBPUSD=X) and the euro (GBPEUR=X) on Wednesday after hitting a two-week low, following another rise in UK inflation.

Sterling held its ground against a stronger dollar, edging up 0.1% to $1.2009, while it traded flat against the euro at €1.1728.

It came as UK inflation climbed to a fresh 40-year high of 9.4% in the 12 months to June, placing further pressure on households as the cost of living crisis mounts.

The Office for National Statistics (ONS) said that June's inflation figure was partly due to a 42% year-on-year increase in petrol prices, and an increase of almost 10% in food prices.

Average petrol prices stood at 184p a litre last month, up 18.1p since May alone, while diesel raced 12.7p higher to 192.4p a litre, which was also a record.

It comes on top of huge gas and electricity tariff increases, with the annual inflation rate standing at a record 70.2% and with further rises to come.

The latest data has now prompted expectations that the Bank of England (BoE) will opt for a bigger half-point rate hike at the next meeting in August to combat high inflation.

It also follows Andrew Bailey suggesting that BoE officials would consider a more aggressive rise in interest rates next month.

The central bank governor told an audience of City figures at the annual Mansion House dinner on Tuesday that the central bank’s Monetary Policy Committee (MPC) had an “absolute priority” to bring inflation back down to its target.

He added that they faced the “largest challenge” to inflation control since the bank gained independence on setting interest rates in 1997.

Read more: What is stagflation and can it lead to a recession?

Inflation is currently well above Threadneedle Street’s 2% target and higher than where it expected it to be at the time of the May monetary policy report, where 9.1% was forecast.

"Within the core, there are signs that an easing in globally driven price pressures are being replaced by domestically driven price pressures," Paul Dales, chief UK economist at Capital Economics, said.

"We think high inflation will mean the Bank of England continues to raise interest rates from 1.25% to 3.00% even when the economy is in recession, although it’s finely balanced as to whether the next hike is a 25bps or 50bps move.”

Financial markets have priced in a 94% chance that the BoE will raise Bank Rate to 1.75% from 1.25%.

The MPC has so far opted for five back-to-back 25 basis points hikes to tackle record high inflation, but a half-percentage-point interest rate hike would be the largest increase since 1995.

Watch: How does inflation affect interest rates?