LONDON, Jan 17 — The pound rose today after data showed Britain’s annual rate of consumer inflation increased in December for the first time in 10 months and came in higher than expected, challenging expectations that Bank of England rate cuts are near.

Sterling was last up 0.1 per cent at US$1.2650 (RM5.97), having been down 0.19 per cent before the data.

The pound also strengthened versus the euro, which was down 0.16 per cent at 85.93 pence.

Official figures showed Britain’s annual rate of consumer price inflation accelerated to 4 per cent in December from 3.9 per cent in November which was its lowest in more than two years.

A Reuters poll of economists had pointed to a reading of 3.8 per cent.

The data, which follows bigger-than-expected falls in inflation in recent months, potentially adds to concerns at the Bank of England, which raised interest rates to a 15-year high of 5.25 per cent in August in a bid to rein in price rises.

Today’s figures showed that core inflation — which excludes volatile food, energy, alcohol and tobacco prices — was 5.1 per cent in December, the same rate as November.

Services inflation increased to 6.4 per cent in December from 6.3 per cent in November.

"The stronger than expected reading for both core and services inflation in December .. are disappointing and will discourage the BoE from beginning to cut rates sooner,” analysts at MUFG said in a morning note.

"The UK rate market is not fully pricing in the first 25bps rate cut from the BoE until June. The hawkish repricing of the UK rate curve has contributed to the pound strengthening modestly this morning.”

Interest rate cuts from most major central banks around the world are expected in 2024, and a major driver for the pound in the near to medium term is whether the Bank of England will begin its rate cuts later than the Federal Reserve and European Central Bank, and by how much.

Market pricing currently indicates a roughly 80 per cent chance of a Bank of England rate cut in May.

It shows just over a 60 per cent chance of the Fed cutting as soon as March, and the first ECB rate cut is fully priced in April, with markets pointing to a small chance they move in March.

Those Fed bets reduced slightly on Tuesday after Federal Reserve Governor Christopher Waller said the Fed should not rush towards cuts in its benchmark interest rate, along with softer economic data out of China, contributing to the stronger dollar. — Reuters