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Sterling Strengthens on Back of BoE’s Hawkish Comments

The pound has risen to a month high, after Mark Carney hinted at a possible rate rise in August

Emma Simon 29 June, 2017 | 12:47AM

The pound continued to rally today, after expectations grew that interest rates in the UK could be increased in August. 

This rally saw sterling breach the “psychologically important barrier” of $1.30, as dollar sentiment slipped.

This appreciation in value followed comments made yesterday by Mark Carney, governor of the Bank of England, that continued UK growth would eventually lead to higher interest rates.

Speaking at a European Central Bank (ECB) forum in Sintra, Portugal, Carney said there were signs that the UK’s long period of weak business investment may be coming to an end. His words immediately caused the pound to jump to a three-week high against the dollar.

Carney added: “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the monetary policy committee continues to lessen and the policy decision accordingly becomes more conventional.”

Could MPC Raise Interest Rates In August?

Speculations has been swirling about the likelihood of an interest rate rise, following recent – and sometimes contradictory – statements from the BoE’s monetary policy committee (MPC).

This month, three members of the MPC voted to raise interest rates. While one of these ‘hawks’  is leaving this committee week, the he is being replaced by BoE economist Andy Haldane, who has signalled his support for an interest rate rise this year - despite previously being seen as 'wuite dovish' and happy for rates to remain low. 

Currently the Base Rate is 0.25% - following a quarter point reduction in August last year. Prior to this the Base Rate has stood at a historic low level of 0.5% since March 2009.

Carney’s latest comments seem to soften the position he took last week when he said “now is not yet the time” to raise rates. 

David Lamb, head of dealing at FEXCO Corporate Payments said: “The hawkish crumbs are turning into a consensus. First Andy Haldane, now Mark Carney. Two of the Bank of England’s most influential grandees have dropped increasingly heavy hints that an interest rate rise is coming.

“To be fair neither has undergone a Damascene conversion. Their hawkish talk is still packed with finely-balanced caveats so beloved of central bankers.” 

James Knightley, an economist at ING said Carney’s comment didn’t suggest a rate rise was a “done deal” but has certainly created expectation and increased speculation ahead of the MPC’s August meeting.

Lamb added: “After nearly a decade of rock-bottom interest rates, Britain’s progress towards a hike remains glacial – slow but seemingly inevitable.”

However Michael Baxter, economics commentator at The Share Centre said he didn’t think an interest rate rise was likely in August – when the MPC next meets. But he said a rate rise before the end of the year “was a distinct possibility”.

He added: “While UK rates may well rise soon, and then against soon after, they are unlikely to rise to anywhere near the levels they were at before 2008 for a very long time, if ever.” 

Bond Sales Fall on Fears of ECB Unwinding Bond-Buying Programme

There have been significant movements in currency, bond and stock markets in recent months, as market analysts try to interpret the sometimes Delphic statements made by those running central banks – both here and overseas.

This week European bond sales plummeted, then rose strongly the day later – following a speech by Mario Draghi – the president of the European Central Bank (ECB) – which was later ‘clarified’.

His initial statements were taken as a sign that the ECB may be considering reversing its current stance on quantitative easing – and could prelude some tapering of its Euro 2.3 trilling bond-buying programme. This caused heavy selling of eurozone bonds.

However, this position reversed a day later when vice president of the ECB, Vitor Costancio suggested that the market had misinterpreted Draghi’s statement, and this did not signal any reversal from the more dovish statement made at the June 8 meeting. ECB officials maintained that the labour slack in the eurozone remained a concern, according to Bloomberg News.

As well as shifting currency and bond markets, Carney’s comments have also buoyed the share price of many leading UK banks – which are seen as one of the main beneficiaries from a rate rise.

HSBC (HSBA) led the rises on the FTSE100 in early trading – with its share price rising by 3.5%. Miners also performed well in early trading.  

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
HSBC Holdings PLC745.50 GBX-0.41
About Author Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk