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Pound rises as Bank of England suggests it may increase interest rates “over the coming months”

By HiFX   /     Sep 14, 2017  /     Market Updates  /     , , , , , , , , , , , , ,

Minutes of today’s Bank of England meeting showed that members voted 7-2 to keep rates on hold. Michael Saunders and Ian McCafferty maintained their vote to increase rates, while the newest member to the committee voted to keep rates on hold.

However, the minutes show that the Bank of England appears to be considering raising interest rates in the near future, as unemployment continues to fall and inflation hits a five year high.

Inflation rising faster than expected

Data released earlier this week showed that inflation had risen faster than expected in August with CPI at 2.9%. This fuelled expectations that the Bank of England may decide to increase interest rates sooner than had previously been expected to curb inflationary pressures.

The minutes of today’s meeting suggest that the Bank of England are considering this course of action. They acknowledge that CPI inflation in August was slightly higher than anticipated and that it could rise to more than 3% in October – significantly higher than their 2% target and a level that would require Governor Mark Carney to write a letter of explanation to the Chancellor.

Members remain hesitant to increase interest rates, due to concerns that this could harm economic growth. However, today they have indicated that this approach may be changing in the near future by stating that, if economic conditions remain as predicted, “some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target”.

What does this mean for the Pound?

There was initially some disappointment from the foreign exchange markets, due to an expectation that the Chief Economist Andy Haldane, who has previously indicated support for increasing interest rates, hadn’t voted to do so. However, the Pound quickly recovered and rallied to a one-year high against the Dollar and also strengthened against the Euro, as the markets digested the minutes of the meeting and the likelihood of an interest rate increase in the coming months.

If this isn’t a “false dawn”, it is possible that Sterling will strengthen further as it becomes more attractive to investors. But, as the Bank of England pointed out today, there are many unknowns about how households and businesses will react to the Brexit process, which could cause long-term doubts about the health of the economy.

Whatever happens next on the currency markets, HiFX is here to help you with your international money transfers. To find out more, please contact us.

 

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