Pound-Euro Firms: Pill Lends Weight to November Rate Hike, Brexit Tensions Ease

Above: File image of Huw Pill. Image © Global Utmaning, Lasse Skog. Modified from original, reproduced under CC licensing, non-commercial.

Market Rates at Publication:
GBP/EUR: 1.1870

Pound Sterling was seen holding levels within spitting distance of 20-month highs against the Euro following comments the Bank of England's Huw Pill that cemented expectations for a November rate hike, while progress towards a final agreement on Northern Ireland is also reported to have been made.

The Bank of England's new Chief Economist has warned inflation is set to smash their existing forecasts and that the prospect of a November interest rate rise was therefore under "live" consideration.

In an interview with the FT, Pill said inflation is likely to rise "close to or even slightly above 5%”.

When prodded about the prospect of a November rate hike, Pill said it "is finely balanced", "I think November is live."

The British Pound has found support in 2021 from expectations that the Bank of England would be amongst the first to raise interest rates amongst the world's major central banks.

This expectation remains intact, lending the Pound support with the Pound to Euro exchange rate seen trading in the 1.1850-1.1870 region.

The 20-month high is at 1.1877.

"The big picture is, I think, there are reasons that we don’t need the emergency settings of policy that we saw after the intensification of the pandemic," Pill said. "The settings [of monetary policy] that we now have are supportive settings. The need for support has diminished, as this [policy] bridge [to the other side of the pandemic] has been built and largely traversed."

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

In August the Bank upgraded the peak in UK inflation to 4.0%, but the scale of the cost pressures impacting the economy have taken economists by surprise.

Alan Jope, chief executive of consumer goods giant Unilever, has said the business was facing a "once-in-a-two-decade inflationary scenario, so we have stepped up pricing".

Ian Wright, the chief executive of the Food and Drink Federation, told lawmakers on Tuesday that inflation in the hospitality sector was running at up to 18% as businesses faced soaring wage, energy and commodity costs.

"In hospitality, which is a precursor of retail, inflation is running between 14% and 18%. That is terrifying," Wright told the Business, Energy and Industrial Strategy committee.

The Bank of England's Governor Andrew Bailey has said on numerous occasions now that his fear is that inflation generated by external factors - such as energy costs - could impact other areas of the economy.

"Further hawkish interventions from MPC members have brought the prospect of an early interest rate hike into sharper focus," says Andrew Goodwin, Chief UK Economist at Oxford Economics. "We would regard raising rates that soon as a policy mistake, albeit one which will do limited damage."

Money markets are now fully priced for a November rate hike, even though recent economic data has come in somewhat mixed.

"We can assume that the BoE is set to hike regardless of data in the early stages of its cycle. Therefore, even though we continue to believe that risks are excessively tilted to the soft side, our current call will be driven by MPC statements," says Fabrice Montagné, an economist at Barclays.

Barclays anticipate the first rate rise to come in December, which Oxford Economics also expect. 

"We think a November move is unlikely – the guidance from the September minutes was clear that Committee members want to assess the impact of the end of the furlough scheme," says Goodwin.

Of the Bank's Monetary Policy Committee it now appears Bailey, Pill, Michael Saunders and Dave Ramsden could be inclined to vote for a hike in November/December.

The weight of Bailey and Pill offer a significant source of gravity for other members who might be questioning whether or not to press ahead with a rate hike.

As the FT notes, "The role of BoE chief economist — previously held by Andy Haldane — involves significant influence over interest rates, financial stability and the direction of research at the central bank."

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One reason to be weary of Sterling cited by some strategists is that Brexit risks remain, in particular those relating to the unresolved Northern Ireland question.

"A potential escalation of the Brexit tensions between the UK and the EU could remain a drag in early 2022," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The Northern Ireland protocol has yet to be fully implemented as both the EU and UK iron out difficulties that have emerged since the signing of the Brexit deal.

The UK has threatened to unilaterally void some elements of the protocol unless the EU agrees to changes, negotiations restarted in October.

But the Times reports Boris Johnson would be prepared to accept a limited role for the European Court of Justice in a bid to unlock a deal with Brussels over the Northern Ireland protocol.

The UK's chief negotiator Lord Frost has said the EU must agree to drop any role for the court, however a compromise is now clearly an option.

"Senior figures have privately raised the prospect of a compromise that would allow a limited role for the ECJ in interpreting the application of EU law in Northern Ireland," reports the Times.

The report says any disputes would go to an independent arbitration panel, with the ECJ asked to interpret narrow matters of EU law as a last resort if dispute resolution failed.

The developments will go some way in easing any lingering Brexit-related concerns on the Pound's outlook.