Pound Sterling Strengthens Supported by BoE Rate Hike Expectations

The rapid rise in UK inflation risks triggering a crisis, putting increasing pressure on the BoE to raise interest rates. These expectations strengthened the pound sterling today.

The pound sterling strengthened against the US dollar and euro, supported by expectations of a stronger Bank of England (BoE) interest rate increase due to high British inflation. In the trading session on Friday (18/February) early morning, EUR/GBP fell 0.32% to 0.8340, while GBP/USD rose 0.34% to 1.3628.

British Inflation Reaches Highest Record Since 1997

The latest UK inflation data released on Wednesday again shows acceleration. UK inflation grew 5.5% on an annual basis, higher than the BoE estimate of 5.4%.

The data further strengthened speculation of another BoE rate hike. Investors estimate that it is not impossible that the BoE will raise interest rates by 50 bps in March to tackle inflation problems. The Bank of England predicts that inflation will peak at 7.25% in April, three times the previous estimate.

According to Yael Selfin, chief economist at KPMG UK, rising UK inflation will take a hard hit on society as the impact of higher energy tariffs comes into force. "The BoE signaled a determination to keep pace with the inflation curve. In the short term, this will put additional pressure on earnings as lenders will continue to charge borrowers more," the economist said.

Bloomberg economist Dan Hanson is more concerned about the size of the interest rate hike needed by the BoE. Hanson said, "The question of whether the UK will raise interest rates in March has been answered unequivocally by the latest series of UK economic data releases. The more pressing issue now is, will there be an event that requires interest rates to be increased by more than 25 bps? Baseline forecasts We are indeed still at a 25 bps increase, but a 50 bps increase cannot be ruled out either."

The pound continues to strengthen after the release of UK inflation data to this day. Even the Russian-Ukrainian conflict which is heating up and generally putting pressure on high risk profile currencies like the pound sterling showed no impact today.

Simon Harvey, Monex Europe analyst said that Sterling is now being resistant to falling risk appetite, even though peer currencies are weakening. In the short term, GBP is considered to be more focused on data and responding optimistically. The pound's next catalyst will be the BoE's monetary policy next month.