Pound and U.K. bond yields slide after Britain’s inflation hits lowest in more than a year

The data is good news for the Bank of England, which despite raising interest rates from near zero at the start of 2022 to 5% currently has struggled to get consumer price inflation down to its 2% target after it spiked into double digits last year.

The report — which was the first lower-than-expected reading in five months — took the market by surprise, forcing sterling
GBPUSD,
-0.66%
down 0.8% to $1.2933 and pushing 10-year gilt yields
TMBMKGB-10Y,
4.171%
down 0.4% to 4.340%.

The FTSE 100
UKX,
+1.04%
rose sharply as investors welcomed the lower pound and bet that U.K. borrowing costs may not have to rise as much as feared.

Jeremy Hunt, U.K. chancellor, welcomed the news, but stressed authorities needed to remain vigilant. “Today’s news shows if the government and the Bank of England are prepared to take difficult decisions, we can win the battle against inflation. But prices are still rising too fast, so we need to stick to the plan until the job is done,”

This view was shared by analysts. “Even with a softer-than-expected figure, inflation in Britain remains high and stickier than in other Western economies, and that keeps odds for further BoE action sensibly more hawkish than for other major central banks. The BoE raised its policy rate to 5% at its latest meeting, and is expected to continue toward 6.5 to 7% range in the next few months,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Saxo U.K CEO, Charles White-Thomson said: “We should prepare for a 25bp hike by the Bank of England on August 03. The war to defeat inflation is not over and the Governor has nailed his colours to the 2% target. Motor fuel prices led the largest downward contribution to the monthly change in CPI while yearly food remains stubbornly high at 17.4% according to the Office for National Statistics.”