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Hotter inflation has strengthened the case for a November interest-rate rise, but higher borrowing and debt above £3tn have given the pound’s good news an awkward catch. Alex Segre / Shutterstock.com
The pound held near a 17-month high against the euro this morning, as yesterday’s hotter-than-expected inflation figures strengthened the case for a November interest-rate rise. Sterling also remained close to its recent highs against the dollar.
September’s inflation rate reached 3.5%, driven largely by fuel, but core and services prices also climbed. Manufacturers reported another sharp increase in costs, leaving the Bank of England with little room to dismiss the pressure as a temporary energy problem.
The timing could hardly be worse for the chancellor. Britain borrowed £24.5bn last month, more than forecast, while public debt passed £3tn for the first time. Debt-interest costs alone reached £10.9bn, another headache ahead of next week’s Budget.
France has problems of its own. Its 10-year borrowing costs touched 5% yesterday, their highest since 2002, as protests and a difficult budget battle unsettled investors. The euro recovered a little overnight, but the government’s financial troubles are proving difficult to shake off.
The US economy appears better placed to cope with higher interest rates. Resilient growth has helped support the dollar, which steadied overnight following recent losses. Investors expect the Federal Reserve to leave rates unchanged next week, although another increase in December remains a possibility. Today’s jobless claims will offer another test of the labour market’s strength.
The Middle East provided another reminder of the risks facing the global economy. Three people were killed in separate attacks near a Saudi oilfield and at Dammam airport yesterday. The US ordered some embassy staff and their families to leave Saudi Arabia, while Brent crude climbed almost 2% to above $110 a barrel.
GBP: Higher rates, higher costs
Sterling remains near its recent highs, supported by expectations of another Bank of England rate rise. Britain's worsening debt-interest bill is becoming harder to ignore, however. Today's £1bn index-linked gilt auction will provide another test of investor demand.GBP/USD: the past year
EUR: France crosses a line
French borrowing costs reaching 5% have added to concerns about the eurozone's finances. Political unrest is making deficit reduction particularly difficult in France, while today's French business confidence and eurozone consumer confidence figures could provide further cause for concern.GBP/EUR: the past year
USD: Fed takes a breather
The dollar steadied overnight as investors prepared for a likely Federal Reserve pause next week. A December increase remains widely anticipated, with resilient US growth helping to support those expectations. Today's jobless claims will provide another test of the labour market.USD/GBP: the past year
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