Sterling is flirting with its highest levels against the dollar since January 2010 after another set of strong inflation data, which will make unwelcome reading at the Bank of England.
February's consumer price index accelerated at 4.4% on year, just above market expectations but actually well below levels suggested by some foreign exchange market scaremongering before the release.
Ahead of the release the pound spiked to $1.6352. Sterling has been one of the best performing currencies so far this year, as investors see the central bank raising rates twice, with the first rate increase currently expected in August. This data will do little to harm these expectations.
However, at the same time as the CPI release, we learned that U.K. public sector net borrowing was the highest on record near £7 billion in February. These two numbers neatly underline the dilemma facing rate setters.
Inflation alone argues unambiguously for higher rates, even if other data (growth, consumer confidence, house prices, borrowing, take your pick) suggest the U.K.'s recover is simply too fragile to take them. The U.K. economy has already seen one quarter of contraction since it emerged from technical recession at the end of 2009, something it did later than any other advanced economy in any case.
Moreover, the coalition government in power since May 2010 will be unveiling its budget plans on Wednesday. They will include significant austerity measures. Monetary tightening combined with the fiscal version will present a huge hurdle. Sterling got something of a pass through much of 2010 and into 2011, in reality, for little more than not being the euro.
The U.K.'s debt problems were not much less severe than those facing peripheral euro zone states such as Ireland and Greece. However, it had its own money, its own central bank and a new government with a mandate to cut. That was sufficient to see the unwelcome spotlight pass on to Dublin and Athens.
However, now times have changed, perhaps decisively. Eurozone leaders have thrashed out the structure of a permanent rescue mechanism to replace the interim bailout fund they came up with on the hoof last year.
Moreover, the European Central Bank is seen as having the will and the leeway to raise rates, something the Bank of England is in danger of losing. It has, after all, refused to tighten policy despite inflation running above its 2% targeted level for well over a year.
With this in mind it is notable that sterling's outperformance against the dollar has not been mirrored against the single currency. The European Central Bank could start raising rates as early as next month.
