The pound hits a one-year high against the dollar as UK inflation remains steady

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The pound hit a one-year high against the dollar on Wednesday after UK inflation figures came in slightly above expectations at 2 percent for June.

The consumer price data was above analysts’ forecasts of 1.9 percent and prompted traders to reduce their bets that the Bank of England will cut interest rates from their current 16-year level next month.

But the inflation figure, provided by the National Statistics Office, remained at the level of the Bank of Albania’s target, which it reached in May for the first time in three years.

After the release of the data, investors put the probability of a quarterly 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 dollar in a year, and last traded up 0.5 percent at $1.3028.

The Monetary Policy Committee has signaled that it is getting closer to lowering rates from their current 5.25 percent. However, such a move will depend on policymakers being confident that underlying price pressures are fully under control.

A major concern has been the stubborn rise in the price of services, which is seen as an important gauge of core inflation. The latest figures showed that services inflation held steady at 5.7 percent in June, ahead of analysts’ expectations for a decline to 5.6 percent.

“It is the stability of services inflation at 5.7 percent that is the blow,” said Paul Dales at Capital Economics. “As a result, the chances of an interest rate cut in August have diminished a bit more.”

Wednesday’s data marked the final inflation release ahead of the MPC’s August 1 meeting, at which it will announce its next rate decision.

The higher-than-expected inflation figure came hours before the King’s Speech, which will outline the new Labor government’s plans to “take the reins off Britain” in a bid to boost economic growth.

“It is welcome that inflation is on target, but we know that for households across Britain, prices remain high,” 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 improve every part of Britain.”

Restaurants and hotels were the biggest drivers of price increases in the year to June. Core inflation, which strips out energy and food, was 3.5 percent, the same rate as in May and in line with analysts’ forecasts.

The BoE described its June decision to keep rates at 5.25 percent as “well-balanced,” with two of the MPC’s nine members advocating a rate cut.

Several other members have since signaled they are on the verge of backing a rate cut, although recent economic data could complicate their decision.

Huw Pill, the BoE’s chief economist, said this week that the central bank had made “considerable progress” in its efforts to reduce price pressures, but added that recent indicators still showed “some upside risk”.

The MPC will also look to UK labor market data due on Thursday for a further indication of the economy’s strength.

“The continued persistence of wage growth and CPI inflation means that the MPC will need to continue only gradually,” said Rob Wood at Pantheon Macroeconomics, “and uncertainty around core inflation pressures means that we expect rate setters to wait until September for their first cut.”