The Bank of England took a second step in normalising UK interest rates when it raised its Bank Rate from 0.50% to 0.75% in early August. It started the process in November 2017 as the UK’s unemployment rate moved further below 5% and core inflation moved above 2.5%. The UK’s latest inflation figures suggest the BoE is likely to continue on its current path despite some reservations arising from the approach of the March 2019 Brexit date.
The annual rate of UK consumer inflation jumped in August, the result of higher transport and housing costs. Consumer price index (CPIH) figures released by the Office of National Statistics (ONS) indicated seasonally-adjusted consumer prices increased by 0.6% over the month, which is more than the 0.5% increase which markets expected and quite a jump from the flat results in June and July. On a 12-month basis and after seasonal adjustments, the consumer inflation rate increased from July’s revised figure of 2.3% to 2.4%.
The figures were higher than expected and UK bond yields increased despite little movement in US and European markets. UK 5-year and 10-year bond yields each increased by 4bps to 1.19% and 1.46% respectively. However, sterling was essentially unmoved against other major currencies.