An inflation report today from the Bank of England (BoE) has surprised markets by striking a more hawkish tone than expected, increasing prospects of the pace and number of interest rate hikes this year. Citing a strong global economy, the Monetary Policy Committee unanimously agreed that inflation over the 2% target can no longer be accepted and that the central bank will have to react with more aggressive tightening of monetary policy. All eyes will now be fixed on the next interest rate hike decision due in May. Sterling has shot up in response to the news as prospects of a higher interest rate historically strengthen currency, up over 1% against a basket of developed market currencies. Markets are selling UK gilts as holding bonds in a rising rates environment becomes less attractive. Meanwhile, the FTSE 100 has sunk into losses of over 1%, in part due to the strengthening of Sterling which diminishes profits from abroad, but also following increased global volatility this week.
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Global markets see continued volatility
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