The British pound extended its gains as producer prices grew by the fastest pace in over 20 years.
Output and input prices increased more than expected on both a core and headline level confirming that inflation is moving beyond food and energy. The Bank of England, which left interest rates on hold last week, will now have a more difficult time reining in inflation. With consumer prices expected to remain above the BoE’s target of 3 percent, central bank Governor King will have no choice but to focus on inflation at the expense of growth. In fact, two year notes fell by the most in 10 years, indicating that bond traders expect a rate hike by the BoE over the next few months. Therefore even if tonight’s RICS house price balance, BRC retail sales report and tomorrow’s industrial production report fall short of expectations, the BoE may not pay much attention to these numbers because for the time being, their hands are tied.