LONDON: Bets on further sterling strength are mounting as some in the financial markets consider the possibility that the Bank of England may be the first of the world’s major central banks to raise interest rates.
The BoE shows no sign of standing in the way of such bets with policymakers seeming less concerned than in recent months about the impact of a stronger pound.
Upbeat UK economic data has fuelled speculation the BoE might hike rates sooner than suggested by Governor Mark Carney’s forward guidance.
By contrast, the European Central Bank is seen more likely to cut rates than raise them. And with the Federal Reserve having shocked markets last week by leaving the pace of its money-printing stimulus unchanged, some analysts say the BoE could even tighten policy before the US central bank.
All this will push sterling even higher, analysts say. While that would have bothered the central bank a few months ago, recent comments from BoE policymakers indicate a more tolerant attitude towards the pound’s recent rise.
The biggest contrast in expectations is between BoE policy and that of the European Central Bank, giving the pound even more scope to rise against the euro than versus the dollar.
“There is an increasing risk of the BoE raising rates before the Fed as well as the European Central Bank,” said Kit Juckes, FX strategist at Societe Generale, who expects euro/sterling at 78 pence some time over the next year, a level last seen in July 2012.
Sterling has risen around nine percent to above $1.60 since it hit a three-year low of $1.4814 in early July. It has gained more than 4 percent against the euro since hitting a 4-1/2 month low on August 1.
Some analysts, including those at Morgan Stanley and Citi expect sterling at $1.63 in the near term.
BoE minutes released last Wednesday showed the minority of policymakers who had previously backed the case for more stimulus had changed their stance in September. In a newspaper interview published on Friday, Carney said he saw no need for more bond-buying as the British economic recovery had “strengthened and broadened”.
By contrast, ECB President Mario Draghi said this week the central bank was prepared to offer banks more long-term loans to keep money-market rates from rising to levels that could hurt the economy.
Richard Usher, head of spot trading in EMEA at JPMorgan, said it would be tough for the BoE to ignore the run of strong UK economic data. “The chance of more QE in the UK is very small now and recent BoE comments reflect that change in sentiment,” he said, adding that sterling at $1.60-$1.70 would not particularly worry the BoE.
The BoE said in its most recent minutes that a stronger pound had improved the inflation outlook.
Back in February, with sterling trading between $1.50 and $1.55, some BoE policymakers said the pound would have to weaken further to support a stagnant economy by boosting exports.
Reuters
