According to the Office for National Statistics, the annual inflation rate in the UK remained unchanged at 8.7% in May, matching the figure from April. However, this result was higher than the market consensus, which had predicted a cooling down of inflation to 8.4%.
The core consumer prices, excluding volatile categories such as food, energy, alcohol, and tobacco, saw a year-on-year increase of 7.1% in May. Analysts had anticipated this figure to remain stable at 6.8% based on April’s data.
London shares closed lower on Wednesday following the release of a surprising UK inflation report, which confirmed market expectations of an impending interest rate hike by the Bank of England on Thursday.
The FTSE 100 index concluded the day 0.1% or 10.13 points lower at 7,559.18. Similarly, the FTSE 250 dropped 0.9% or 174.71 points, closing at 18,571.45. The AIM All-Share experienced a decrease of 0.3% or 2.16 points, settling at 783.02.
Meanwhile, the Cboe UK 100 ended with a 0.1% decline at 754.15, the Cboe UK 250 closed 0.9% lower at 16,289.81, and the Cboe Small Companies concluded 0.2% down at 13,187.42.
Danni Hewson, the head of financial analysis at AJ Bell, noted that the UK’s inflation situation is persisting stubbornly and has solidified expectations for a rate hike by the Bank of England. Hewson also mentioned that there is growing speculation that the rate increase might be higher than initially anticipated.
Previously, the market had generally expected a quarter-point increase. However, the higher-than-expected inflation figure has caused some analysts to suggest the possibility of a 50-basis-point hike.
Hewson expressed concerns about the potential of the Bank of England raising interest rates to 6% early next year, particularly considering the stress it already places on consumers and businesses at the current rate of 4.5%.
The Bank of England is scheduled to announce its interest rate decision on Thursday at 1200 BST, followed by a press conference featuring Governor Andrew Bailey at 1230 GMT.
At the close of the London Stock Exchange on Wednesday, the pound was quoted at USD1.2727, slightly lower than Tuesday’s closing rate of USD1.2743. However, following the publication of the inflation data, the pound saw a temporary recovery and was trading around USD1.2770.
Ricardo Evangelista, a senior analyst at ActivTrades, explained that the initial response to the inflation report caused gains in the pound as investors anticipated interest rate hikes and subsequently increased their demand for the currency. However, he noted that this upward pressure subsided quickly, with the broader outlook for the pound remaining negative. Evangelista expects further monetary tightening to impede economic activity, potentially leading to a contraction and resulting in a weakened currency.
