July 16--Sterling soared to a six-year high yesterday after an unexpectedly sharp rise in inflation bolstered the case for an early rise in interest rates.
The Office for National Statistics said the consumer prices index measure of inflation jumped from 1.5pc in May to 1.9pc in June – its highest level since January.
The pound powered to $1.7191 against the dollar and to euro 1.2642 against the euro as investors bet on an interest rate rise before the end of the year.
Sterling also hit its highest level in six years against currencies from around the world, according to the Bank of England.
Higher interest rates are typically used to curb inflation.
At the same time, the prospect of higher interest rates usually boosts the value of the currency because of the promise of higher returns for investors.
Although inflation is still below the 2pc target, investors are increasingly convinced the Bank will start raising rates before the end of this year or early next year having held them at emergency lows of 0.5pc since March 2009.
The Bank will also be keeping an eye on the housing market with official figures yesterday showing UK prices up 10.5pc in the year to May while prices in London were 20.1pc higher.
Chris Williamson, chief economist at Markit, said: 'UK inflation moved sharply higher in June alongside another surge in house prices. The news will further fuel expectations that the Bank will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike.'
Higher interest rates would bring relief to Britain's army of savers. But they will push up mortgage costs for millions of homeowners.
David Kern, chief economist at the British Chambers of Commerce, said: 'The increase in inflation in June should not spark a knee jerk reaction on interest rates.'
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