Sterling Jumps After Data Shows UK Inflation Tops 2%

By Amanda Cooper

LONDON (Reuters) -Sterling jumped on Wednesday after data showed UK consumer inflation accelerated more quickly than forecast in October, supporting the view that the Bank of England will lower interest rates gradually in the coming months.

An anticipated rise in energy bills last month pushed up the annual rate of inflation to 2.3%, from September’s 1.7% rate, according to official figures.

The core rate, which excludes food and energy prices, rose 3.3%, versus 3.1% in September, while services inflation – one of the BoE’s areas of concern – rose 5%, compared with the prior month’s 4.9% increase.

The pound rose by as much as 0.25% after the data and was last up 0.17% at $1.2703. Against the euro the pound was up 0.28% at 88.435 pence.

“UK inflation was slightly higher than expected in October, although not by enough to be concerning, as higher energy costs kicked in,” Neil Birrell, who is chief investment officer at Premier Miton, said.

However, if we do see food prices rising as well, the rather stagnant economy could come under more pressure, so attention will focus on the Bank of England’s policy approach,” he said.

Finance minister Rachel Reeves’ budget, which contains hefty increases to taxes, spending and borrowing, is expected to feed into a higher rate of inflation.

Money markets show traders expect the BoE to cut rates by a little more than half a point, or 50 basis points, by next December, compared with about 75 bps from the U.S. Federal Reserve and around 160 bps from the European Central Bank.

The expectation for a shallower decline in rates from the BoE has given sterling an edge this year.

It is still the best-performing major currency against the dollar, even though it has turned negative on the year in the face of broad U.S. currency strength that followed Donald Trump’s Nov. 5 presidential election win.

(Reporting by Amanda Cooper; Editing by Alun John and Christina Fincher)