The pound leapt above the $1.36 mark on Friday to its highest level since the aftermath of the Brexit vote, as a speech from a Bank of England policymaker hardened perceptions that the central bank is moving to raise interest rates for the first time in a decade.
Gertjan Vlieghe, a member of the bank’s Monetary Policy Committee who has previously been cautious about tightening policy, said “we are approaching the moment when Bank Rate may need to rise”.
Coming a day after the MPC kept rates on hold, but gave a heavy signal it is minded to lift the base rate from a record low, the speech added fuel to the pound’s rally.
Investors sold shorter dated government bonds, which are sensitive to changing expectations for the base rate, pushing the yield up 10 basis points to 0.47 per cent. That is the highest level since the week before the EU referendum in June 2016.
UK stocks were also hard hit by the sterling move, the FTSE 100 index sliding 1.3 per cent .
“The BOE really have lined up the market for a hike,” said Jordan Rochester, a currency strategist, at Nomura
Friday’s 1.3 per cent advance leaves sterling up almost 3 per cent against the dollar this week, which began with stronger than expected inflation figures. The currency also powered higher against the euro, rising 1.1 per cent and was trading at just under 88p versus the euro
Although the MPC voted 7-2 to hold rates yesterday, the commentary accompanying the decision — and Mr Vlieghe’s speech today — is convincing more investors that after talking about lifting rates earlier in the year, the MPC is now more serious about doing so.
“The possibility of a November or February hike is real, we think,” analysts at Bank of America Merrill Lynch noted. “That said, we cannot understand why the BoE would want to hike rates just as currency effects on inflation are about to fade while domestic price pressure is non-existent. They seem to be panicking about the inflation peak rather than looking ahead to the likely sharp drop next year.”
Before Mr Vlieghe’s speech on Friday morning, currency analysts had thought the pound was heading to $1.35 sooner than expected, given the increasingly hawkish BoE slant and its concerns about rising inflation. Yet some have reservations about the shift from the bank..
Mr Vlieghe acknowledged that inflation may ease back, and that uncertainty over the outcome of the Brexit negotiations may have “a larger impact on the economy than we have seen so far”.
David Meier, an economist at Julius Baer, said he was sceptical about the BoE tone shift, saying it was “deliberately set to stabilise further the pound sterling”.
The currency’s weakness has been a strong driver of inflation and the pound’s renewed strength “will limit the inflation overshoot”.
While strategists at Nomura now believe the BoE will raise rates in November, Mr Rochester said there remained “many doubters” in the market. But added that the notion the idea of the BoE turning hawkish to support the currency and rate markets was a conspiracy theory.
“The BoE have had a continually evolving narrative towards hiking all year and now are at the brink of action,” said Mr Rochester.