According to Reuters
British inflation defied predictions of a slowdown and held at 8.7% in May, putting yet more pressure on the Bank of England a day before it is expected to raise interest rates for the 13th time in a row to tame stubborn price growth.
Markets increased their bets on further rate rises following Wednesday’s official figures, which also showed underlying inflation rose to its highest since 1992 last month.
The headline figure means British inflation is once again the fastest of any major advanced economy. The numbers are uncomfortable for Prime Minister Rishi Sunak – who has pledged to halve inflation over the course of this year before a probable 2024 election – and are likely to add to the rise in mortgage costs for millions of homeowners.
Economists polled by Reuters had forecast that the annual consumer price inflation rate would drop to 8.4% in May, moving further away from October’s 41-year high of 11.1%.
“May’s CPI figures ratchet up the pressure on the Monetary Policy Committee to increase Bank Rate substantially further over the coming months,” Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said.
Sterling briefly jumped against the U.S. dollar and the euro after the figures were released and two-year government bond yields – which are sensitive to interest rate expectations – rose to their highest since July 2008.
Markets now see a 40% chance that the BoE will raise interest rates by half a percentage point to 5% on Thursday, rather than the quarter-point move previously expected. They see a 60% chance of rates reaching 6% by December.
“Today’s figures strengthen the case for the government to stick to its guns,” finance minister Jeremy Hunt told reporters.
“If you look at what’s happening in other countries, you can see that rises in interest rates do bring down inflation over time, that will happen here,” he added.
Hunt’s counterpart in the opposition Labour Party, Rachel Reeves, said Labour would have “a relentless focus on the cost of living” if it was in power.