The UK has become the latest country to record an unwanted multi-decade-high inflation in December. At 5.2%, CPI is 2.6 times above the BoE’s 2% target and will require a real effort to bring it back down without causing undesired pressure on the economy. For one thing, nominal wage inflation is very high right now – and rightly so – as workers demand higher pay to prevent their real earnings from taking too big a hit. For another, much of the inflation gains are a global issue, and the UK central bank and government can do so much to bring prices back down on their own. Indeed, with oil prices at 7-year highs, things could get even worse before prices peak.
Still, the pressure heaps on BoE Governor Andrew Baily and his MPC colleagues. The BoE has not been this much off target since inflation targeting started in 1992. There is a chance may get some immediate response from Bailey later at 14:15 GMT when testifies before the Treasury Select Committee, along with Deputy Governor Jon Cunliffe. Any potential comments about the possibility of speeding up the hiking cycle could send gilt yields – and the pound – further higher.
Source: ThinkMarkets and TradingView.com
UK’s 10-year yields have already climbed to a fresh high on the year, reaching 1.300%, its highest since March 2019. But there is a risk they could rise even further.
It is hard to imagine the BoE governor remaining very calm after consumer prices surged to an annual pace of 5.4%, the highest level for almost 30 years, compared with 5.1% in November and 5.2% expected. Core CPI (4.2%) and RPI (7.5%) also came in above expectations, further increasing the pressure on the central bank to hike interest rates again when it meets next month.
Source: ONS
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