The pound rose after the release of better-than-expected inflation data on Wednesday that will strengthen the case for the Bank of England to raise interest rates in the future.  While this means that households in Britain will be burdened with the soaring cost of living as petrol and diesel prices have gone up, it is seen as positive news for markets and the pound as it will push the BoE to act.

Inflation data

According to the ONS, headline Consumer Price Index (CPI) inflation rose 1.1% month-on-month in March, more than the 0.7% that markets had forecast. The annual rate of increase came in at a 30-year high at 7.0%, exceeding the 6.7% expected and the 6.2% February figure.

The rise is the fastest in three decades. Core inflation rose by 0.9% in March, as price pressures increased, and this will have to be addressed by the Bank of England.

The chancellor, Rishi Sunak, attributed the rising costs to global supply chain and energy market pressures which could be made worse by the war in Ukraine. He said: “I know this is a worrying time for many families, which is why we are taking action to ease the burdens by providing support worth around £22bn in this financial year, including for the most vulnerable through our household support fund. We’re also helping as many people as possible into work – the best way for families to gain economic security in the longer term.”

Market reaction



Traders reacted by buying the pound as the data boosted expectations for more interest rate hikes, with 140 basis points of hikes expected to be delivered in 2022.

However, some analysts have warned that the pound’s gains might be short-lived as economic growth could slow down due to inflationary pressures which will hit households, consumer confidence and economic activity.

JP Morgan has warned that inflation might not be as positive as some may think and could  have a negative effect on the pound due to stagflation and an economic slowdown.

For households, if inflation moves above the 8% YoY in April and lasts for months after, then people will struggle in an economy that remains vulnerable.

For the coming week, if more data is strong and shows a tight labour market and consistent growth then this will mean that the BoE hiking cycle will continue, offering support to the pound.

Others believe that hiking interest rates will provide no help as inflation is being driven by an external energy shock. There is also the argument that inflation will do the BoE’s job and there is no need for hiking rates as it will destroy demand and recovery.

The outlook for interest rates has then become difficult to predict and this will make things for the British currency more complicated. In terms of inflation, it is expected to fall in 2023, below 2.0% in the second half of next year.

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