Pound roars back as rates head to 4pc

THE pound has roared back above $ 1.24 as investors bet interest rates will hit 4pc as soon as next month.

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

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

The rally came as figures showed inflation remained well above 10pc in December despite falling for a second month.

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

But it remains more than five times above the 2pc target – eating into wages and savings and hitting living standards.

The still sky high level of inflation paves the way for further interest rate hikes as soon as next month in a move that typically boosts the pound.

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

That would be the highest rate since the depths of the financial crisis in 2008 and push up borrowing costs for millions of borrowers. The Bank has already raised rates from a record low of 0.1 per cent in December 2021 to 3.5pc in a desperate effort to tackle inflation.

Ruth Gregory, senior UK economist at Capital Economics, said: ‘The small drop in inflation from to 10.5pc suggests the inflation battle is not yet won. This supports our view that the Bank of England will raise rate from 3.5pc to 4pc in February and to a peak of 4.5pc in the coming months.’

Interest rates last stood at 4.5pc in November 2008.

The pound fell to an all-time low close to $1.03 in the aftermath of the mini-Budget cooked up by then prime minister Liz Truss and her chancellor Kwasi Kwarteng in September.

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

Crucially, there were no details of the spending cuts that would be required to stop borrowing spiralling out of control, and no assessment of the plans by the Office for Budget Responsibility.

The pound has bounced back since then as new Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt battle to restore the Conservative’s reputation for ‘sound money’. Sterling has now gained around 20pc against the dollar since its September lows.

At the same time, the FTSE 100 index has gained almost 15pc since October, despite slipping 0.3pc, or 20.33 points, to 7830.70 yesterday, leaving it close to its all-time record close of 7877 in May 2018.

Rishi Sunak has pledged to cut inflation ‘in half by the end of the year’. And ministers are resisting pay demands from public sector trades unions for fear of fuelling inflation further, triggering a wave of strikes.

Reacting to the latest inflation figures, Mr Hunt said: ‘High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down.

‘While any fall in inflation is welcome, we have a plan to go further and halve inflation this year, reduce debt, and grow the economy but it is vital that we take the difficult decisions needed and see the plan through.’

■ The average UK house price edged down in November from a previous record high, according to official figures.

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

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

But it was a slight decrease from the previous month’s record high of £296,000.