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The pound hit a one-year high against the dollar on Wednesday after UK inflation data came in slightly above expectations at 2 percent for June.
The consumer prices data came in above analysts’ estimates of 1.9 percent and prompted traders to cut their bets that the Bank of England will cut interest rates from their current 16-year high next month.
However, the inflation figure provided by the Office for National Statistics remained at the BoE’s target level, which it reached in May for the first time in three years.
After the data was released, investors estimated the odds of a quarter-percentage-point rate cut next month at just over a third, having previously been evenly split.
The pound climbed as high as $1.3044, its strongest level against the greenback in a year, before easing slightly to trade 0.4 percent higher on the day at $1.3007.
The Monetary Policy Committee has indicated that it is close to cutting rates from the current 5.25 percent. However, such a move would depend on policymakers being confident that underlying price pressures are fully under control.
A key issue has been the stubborn rise in service prices, which is seen as an important measure of core inflation. The latest data showed services inflation held steady at 5.7 percent in June, beating analysts’ expectations for a drop to 5.6 percent.
“It is the stability of services inflation at 5.7 percent that is the blow,” said Paul Dales of Capital Economics. “As a result, the chances of a rate cut in August have narrowed even further.”
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Wednesday’s data marked the final inflation release before the MPC meets on August 1, when it will announce its next rate decision.
The higher-than-expected inflation came hours before the King’s Speech, which will outline the new Labor government’s plans to “put the brakes on Britain” in a bid to boost economic growth.
“It is welcome that inflation is on target, but we know that prices remain high for families across Britain,” said Darren Jones, chief secretary to the Treasury.
“That’s why this Government is taking the hard decisions now to fix the foundations so we can rebuild Britain and make every part of Britain better.”
Restaurants and hotels were the biggest drivers of price growth in the year to June. Core inflation, which strips out energy and food, was 3.5 percent, the same as in May and in line with analysts’ forecasts.
The BoE described its June decision to hold rates at 5.25 percent as “finely balanced,” with two of the MPC’s nine members advocating a rate cut.
Some other members have since signaled they are on the verge of supporting a rate cut, although the latest economic data may complicate their decision.
Huw Pill, the BoE’s chief economist, said this week that the central bank had made “significant progress” in its efforts to reduce price pressures, but added that recent indicators still pointed to “some upside risk”.
The MPC will also look at UK labor market data due on Thursday for further indication of the economy’s strength.
“The continued persistence of wage growth and CPI inflation means the MPC will need to move only gradually,” said Rob Wood of Pantheon Macroeconomics, “and uncertainty about underlying inflationary pressures means we expect rate-setters to wait until September for their first cut. .”