The pound rose against the dollar for the first day in six as a report showed inflation accelerated more than forecast in April and reached the fastest pace since 2008, prompting investors to bet on higher interest rates. Gilts fell, while sterling appreciated against 15 of its 16 major peers, gaining most against Japan’s yen. U.K. consumer prices rose 4.5 percent last month from a year earlier, the Office for National Statistics said today. The median forecast of 32 economists in a Bloomberg survey was 4.1 percent. The Bank of England left its key rate unchanged at 0.5 percent on May 5 as policy makers prioritized growth over taming inflation. “The inflation rate was higher than expected, and therefore we saw the pound benefiting,” said You-na Park, a currency strategist at Commerzbank AG in Frankfurt. “The market is still waiting for signs regarding the first rate hike from the Bank of England. If inflation stays at higher levels, an earlier rate hike becomes more likely.” The pound rose 0.5 percent to $1.6277 at 10:45 a.m. in London. It appreciated as much as 0.7 percent to 86.82 pence per euro before trading at 87.05 pence. It gained 1.6 percent to 132.95 yen. Short-sterling futures extended a decline after the inflation report. The implied yield on the December futures contract rose seven basis points to 1.13 percent, a sign investors were adding to bets for higher borrowing costs. Sonia Forwards Money markets now price in a 25 basis-point increase in the key rate in December, according to sterling overnight interbank average forwards, Tullett Prebon Plc data show. Bank of England Governor Mervyn King said the recent surge in inflation is being driven by higher sales taxes and increased energy and import prices. “Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred inflation would have been substantially lower and probably below the target,” King said in a letter to Chancellor of the Exchequer George Osborne published today. Inflation is likely to rise further over the next few months, he said. The Bank of England signaled it may need to raise rates later this year even as the economy struggles to build momentum. Minutes from the May 5 meeting will be released tomorrow and will show how policy makers voted. U.K. 10-year government bond yields rose four basis points to 3.43 percent. Two-year yields were five basis points higher at 1.05 percent. To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

Source