Pound roars back above $1.24 as rates head towards 4%

The pound roared back above $1.24 as investors bet interest rates will hit 4 percent next month.

Sterling rose to $1.2435 against the US dollar – the strongest position of 2023 so far and a level not held since the first half of last year.

It also surpassed €1.14 against the single currency for the first time this year.

The rally came as data showed inflation remained well above 10 percent in December, despite falling for a second month.

The Office for National Statistics said inflation fell to 10.5 percent from 10.7 percent in November last month and to a 41-year high of 11.1 percent in October.

But it remains more than five times above the 2 percent target — at the expense of wages and savings, and hitting living standards.

Still skyrocketing inflation paves the way for further rate hikes from next month, a move that typically boosts the pound.

Analysts think the Bank of England is likely to raise interest rates from the current 3.5 percent to 4 percent at its next meeting on February 2.

That would be the highest rate since the nadir of the 2008 financial crisis and drive up borrowing costs for millions of borrowers.

The Bank has already raised interest rates from a record low of 0.1 percent in December 2021 to 3.5 percent in a desperate bid to tackle inflation.

Ruth Gregory, senior UK economist at Capital Economics, said: ‘The small drop in inflation from 10.5% suggests that the inflation battle is not yet won.

“This supports our view that the Bank of England will raise interest rates from 3.5% to 4% in February and to a peak of 4.5% in the coming months.”

In November 2008, the interest was last at 4.5 percent.

The pound fell to a low of nearly $1.03 in the wake of the mini budget drafted by then Prime Minister Liz Truss and her chancellor Kwasi Kwarteng in September.

Investors were shocked by the promises of huge tax cuts and a hugely expensive package to support households and businesses with their energy bills.

Crucially, there were no details of the cuts that would be necessary to prevent loans from spiraling out of control, and there was no review of the plans by the Office for Budget Responsibility.

The pound has since rebounded as new Prime Minister Rishi Sunak and his chancellor Jeremy Hunt battle to restore the Conservatives’ reputation for “sound money”. Sterling is now up about 20 percent against the dollar since its low in September.

At the same time, the FTSE 100 index is up nearly 15 percent since October, despite falling 0.3 percent, or 20.33 points, to 7830.70 yesterday, coming close to its May 2018 all-time high of 7877.

Rishi Sunak has pledged to “halve inflation by the end of the year.” And ministers are resisting wage demands from public sector unions for fear of further fueling inflation, triggering a wave of strikes.

Commenting on the latest inflation figures, Mr. Hunt: High inflation is a nightmare for household budgets, destroys business investment and leads to strikes, so no matter how hard we act, we must stick to our plan to bring it down.

While any fall in inflation is welcome, we have a plan to go ahead this year and cut inflation in half, reduce debt and grow the economy, but it is vital that we make the tough decisions that are needed and carry out the plan.’

÷ Median house prices in the UK fell slightly in November from a previous all-time high, according to official figures.

Property prices rose 10.3 percent in the year to November 2022, slowing from 12.4 percent annual growth in October 2022, the Office for National Statistics said.

It said the typical UK house price was £295,000 in November, which was £28,000 higher than a year earlier.

But it was a slight drop from last month’s all-time high of £296,000.