GBP/USD Reacts to UK Inflation ahead of Testimony on Monetary Policy

It was a busy morning for the GBP/USD, with UK inflation drawing plenty of interest.

Following the wage growth and unemployment numbers on Tuesday, today’s figures placed more pressure on the Bank of England to deliver another hefty rate hike in December.

The UK annual inflation rate accelerated from 10.1% to 11.1% in October. Economists forecast an inflation rate of 10.7%.

According to ONS,

• The Consumer Prices Index, including owner occupiers’ housing costs (CPIH), accelerated from 8.8% to 9.6%.
• Housing and household services (primarily electricity, gas, and other fuels), food & non-alcoholic beverages, and transport (principally motor fuel) drove the CPIH higher.
• Month-on-month, the CPIH rose by 1.6% versus 0.9% in September.
• Gas and electricity prices made the largest contribution to CPIH and CPI annual inflation rates despite the introduction of the Government’s Energy Price Guarantee.
• Rising domestic fuel prices push CPIH and CPI inflation rates to levels last seen over 40 years ago.

Inflation Likely to Be a Topic of Debate with Lawmakers

The latest numbers will make today’s Treasury Select Committee hearing on the November Monetary Policy Report more challenging for the Bank of England.

BoE Governor Andrew Bailey, Ben Broadbent, Catherine Mann, and Swati Dhingra will give testimony at the Treasury Select Committee hearing on the November Monetary Policy Report (1415 BST).

Tuesday’s wage growth figures and today’s inflation numbers raised the risks of inflation becoming embedded. The numbers come at a difficult time, with the UK Government set to announce its Autumn Budget tomorrow.

For the Bank of England, bringing inflation to target remains the objective. The Bank of England forecasts the UK economy to contract in five out of six quarters if the Bank stands pat on interest rates.

Considering the Bank’s monetary policy impact assessment, further rate hikes would spell more trouble for the economy. The latest figures may well be a talking point later today.

Following the Bank of England’s November policy decision, the Bank’s Chief Economist Huw Pill said,

“Our target is ultimately not on the real economy. Our target necessarily, because we’re running monetary policy, is to contain inflation.”

Pill added,

“The slowdown in the economy is what we anticipate is required to contain domestic inflationary pressures to achieve our targets.”

The comments reinforced the Bank’s commitment to tackling inflation. However, economic uncertainty has created a degree of monetary policy uncertainty. Immediate market reaction to the numbers likely reflects the possible impact of inflation on the UK economy rather than BoE policy.

GBP/USD Price Action

At the time of writing, the Pound was 0.05% to $1.18602.

Before today’s inflation figures, the GBP/USD rose to a morning high of $1.18876 before falling to a low of $1.18317.

In response to today’s inflation number, the GBP/USD struck a day high of $1.19036 before sliding into the red.