Sterling rises after UK CPI data shows inflation easing in June

Sterling rose against the US dollar in trading this morning after UK CPI data showed the annual rate of inflation at its lowest since February this year.

The Office for National Statistics said annual consumer price inflation eased to 3.2% from May's 3.4% - as expected by most city economists'. The pound rose against the dollar in response from $1.4965 to $1.5040.

Mark Bolsom, Head of the UK Trading Desk at Travelex Global Business Payments said, "This reading supports the Bank of England's consensus that inflation will begin to subside naturally, as temporary factors such as January's VAT rise fade away over time. It also validates their decision to keep interest rates on hold at 0.5%.

"However, with the next VAT hike in the pipeline, we are likely to see this higher level of inflation continue over the next 12 months, thereby putting pressure on the Bank to raise rates.

"Nevertheless, even with the potential for a pick up in underlying inflation, a higher CPI figure is unlikely to impact the Bank's monetary policy. I expect that with the ongoing debt crisis in the eurozone, aggressive fiscal tightening in the UK and subdued wage inflation, the Bank will persist with its policy of low interest rates until the beginning of 2011 at least.

Bolsom concludes, "Only when the MPC start to withdraw their quantitative easing programme will we get a true indication of the currently bolstered CPI figure."