UK (Commonwealth Union)_ The British pound has plunged on Thursday during the trading session, and the Bank of England has decided to sit still with its interest rate.
The pound tumbled to a ten-month low and shares rallied as a surprise fall in inflation raised hopes that interest rates might have already peaked.
The Office for National Statistics said in a report that caught the City off guard, that inflation dipped from 6.8 per cent in July to 6.7 per cent in August.
The figures sent shockwaves through the financial sector and bucked forecasts that inflation would rise to 7% or even higher.
Analysts said it may be enough to stop the Bank of England raising interest rates today with the decision on a knife-edge at present.
Sterling plummeted to as low as $1.2335 and €1.1549 while gilt yields – a key measure of government borrowing costs – also dropped.
Simultaneously, housebuilders and commercial property developers led the stock market higher, with the FTSE 100 up 0.9 per cent to 7731.65 and the FTSE 250 up 1.6 per cent to 18,712.37.
High Street retailers were also on the move on hopes that the squeeze on family finances may finally be ending.
Goldman Sachs predicted that the Bank’s Monetary Policy Committee (MPC) will leave rates unchanged at 5.25 per cent today.
British Pound vs Japanese Yen Technical Analysis
The British pound plunged against the Japanese yen during the trading session on Thursday, as the Bank of Japan has its interest rate decision coming in a few hours. The Bank of England has furthermore, decided to hold still with its monetary policy decision, which has massive implications as it was against the overall consensus. Owing to this, it is not a huge surprise to see that the pound has gotten hammered against the Japanese yen as there will be a lot of people out there who are concerned about the potential shock coming out of Bank of Japan decisions and of course jawboning.
The US bank said in a report ‘We now expect the MPC to keep Bank Rate unchanged and lower our forecast for the terminal policy rate to 5.25 per cent from 5.5 per cent.’
The housebuilders were among the biggest stock market winners with Crest Nicholson gaining 5.8%, or 10.5p, to 190.8p, Taylor Wimpey rising 5.6%, or 6.4p, to 121.7p, Barratt Developments climbing 4.7%, or 21p, to 465.5p, Bellway leaping 5%, or 108p, to 2268p and Persimmon surging 5.1%, or 53.5p, to 1100p.
Property developer British Land gained 3.9%, or 12p, to 321.1p and rival Land Securities added 4.1%, or 23.6p, to 606.4p, while budget retailer B&M leapt 4%, or 22.2p, to 579p and B&Q-owner Kingfisher shot up 4.3%, or 8.9p, to 215.7p.
Russ Mould, investment director at AJ Bell, said that weaker inflation fuels the argument that interest rates no longer need to go up, or at least not by much more.
He said, ‘That would be positive for property-related companies as well as retailers because consumers would, in theory, no longer face additional pressures on their finances”. He said that although they could still get another rate rise from the Bank of England, the latest inflation data increases the chance that a further rate hike could be the last in the current cycle.
The Bank has already raised rates from 0.1% to 5.25% since December 2021 in a bid to bring inflation back under control.
But while inflation has fallen from a peak of 11.1% in October last year to 6.7% last month, it remains more than three times above the 2% target.
Until yesterday, the Bank was widely expected to raise rates to 5.5% today, with financial markets suggesting there was an 80% chance of such a move and last night it was put at around 50-50.
The fall in core inflation – which excludes food and energy prices – from 6.9 to 6.2 was seen as a particularly welcome sign price pressures are easing.
So was the drop in inflation in the services sector, with prices in August 6.8 per cent higher than a year earlier, down from the 7.4 per cent increase seen in July.
But Victoria Scholar at Interactive Investor said that while inflation was coming down signaling interest rates are at or close to their peak, the oil price remained a ‘key risk’ to the outlook.
Oil hit a ten-month high above $95 a barrel this week which drove up the cost of fuel for motorists and airlines.
