Inflation concerns lift euro and sterling

Eurozone and UK inflation concerns were aggravated Monday, pushing the euro and sterling higher against the dollar ahead of Tuesday’s Federal Reserve interest rate decision.

Sterling saw the bigger move after an unexpected surge in producer price inflation cast doubts over future UK interest rate cuts.

Headline output prices rose to a 16-year high of 4.5 per cent, reflecting the increasing pressure on manu­facturers to pass on costs to wholesalers. This was driven by a sharp rise in input prices to an annualised 10.2 per cent as fuel prices bit, the UK Office for National Statistics said.

Howard Archer at Global Insight said the data would reinforce concerns that elevated oil and food prices might push up consumer price inflation.

He added: “The Bank of England needs to be confident that slowing growth is diluting underlying inflationary risks before trimming interest rates further.”

The pound rose 0.8 per cent to $2.0480 against the dollar and added 0.9 per cent to Y228.81 against the yen. The euro fell 0.4 per cent to £0.7182.

Speculation that the European Central Bank’s next move on rates may be up was further fuelled after Joaquín Almunia, the European Union’s monetary affairs commissioner, reiterated ECB fears of higher oil and commodity prices feeding into firmer wage de­mands.

Meanwhile, Jürgen Stark, ECB executive board member, said eurozone inflation could be higher next year than the central bank’s current projections suggest.

Last week, ECB president Jean-Claude Trichet shocked markets by suggesting the central bank’s governing council had discussed an interest rate increase ahead of its decision to keep rates on hold at 4 per cent.

“In our view, economic data are on the verge of justifying a rate hike,” said Niels-Henrik Bjørn at Danske Bank.

Whether this is likely or not, most economists now believe eurozone interest rates will be on hold throug­hout next year, while the Fed is expected to cut US rates Tuesday by 25 basis points to 4.25 per cent.

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