Pound's Rally Linked to Bank of England's Ramsden, Mann

Above: File image of Dave Ramsden. Image © Bank of England.

The British Pound has risen over the course of the week, with analysts saying a portion of the advance can be attributed to a firming up of Bank of England interest rate hike expectations.

Bank of England policymakers have this week confirmed further rate hikes are required to bring inflation under control, raising investor expectations for the number of rate hikes that are still yet to come from the central bank.

Deputy Governor Dave Ramsden said in a speech Thursday he would "continue to vote to respond forcefully" to signs of persistent inflationary pressures.

Given there are no credible signs UK inflation is ready to cool materially, further hikes are therefore likely.

Most economists polled by Reuters expect the Bank to hike interest rates by a further 50 basis points in December, although there is a sizeable minority who say a 75bp hike is likely.

"Although my bias is towards further tightening, if the economy develops differently to my expectation and persistence in inflation stops being a concern, then I would consider the case for reducing Bank Rate, as appropriate," Ramsden said in a speech at King's College London.

But such a turn is a long way off with the ONS unexpectedly reporting on Friday they had underestimated UK inflationary pressures in a recent bulletin.

Headline annual output producer price inflation (PPI) was revised up by an average of 1.8 percentage points from January to October 2022, with the latest reading for last month revised up to 17.2%, from 14.8% previously.

Ramsden said he would be highly responsive to incoming data with regard to how he voted on the Monetary Policy Committee (MPC)

Ramsden was joined by the Bank's Chief Economist Huw Pill and MPC member Catherine Mann at the Bank’s Economy Watchers’ Conference.

"There was a key consistent message from the three BoE officials – inflation remains a problem and hence more monetary tightening is needed to bring inflation down," says Derek Halpenny, Head of FX Research for EMEA at MUFG.

Above: GBP/EUR at daily intervals showing a looming resistance zone which could hamper gains over coming weeks. Consider setting a free FX rate alert here to better time your payment requirements.

Typically, expectations for further rate hikes are supportive of Sterling, therefore the developments could be consistent with this week's outperformance by Pound Sterling.

"The pound rose to a three-month high above 1.21 against the US dollar, although it has edged a little lower overnight. The most recent rally was supported by comments from BoE rate-setters confirming that interest rates will likely have to rise further to curb inflation despite the economic downturn," says a market note from Lloyds Bank.

Mann and Ramsden are two of the MPC's noted 'hawks' and continue to advocate for further rate hikes to avoid the risk of inflation becoming entrenched and wage growth accelerating.

The speech and comments resulted in some mild upward pressure on rates with the implied terminal rate now drifting over 4.60%, notes MUFG.

Ramsden also expressed doubts over the Bank's forecasts, particularly those projecting inflation will fall back to 2.0% over the next three years without any further hikes in Bank Rate.

Regarding the recent turmoil in UK bond markets, he said the UK as a whole "had work to do" in order to restore its international reputation following the ill-received mini-budget of previous prime minister Liz Truss, although much of the "policy premia" seen in money markets has since disappeared.

Above: GBP and NZD lead the pack this week.

"Credibility is hard won but easily lost. So whilst on the surface, the facts point to this premium having disappeared, there's no doubt that our reputation has taken a hit.. as a kind of economic policymaking jurisdiction," Ramsden said.

MUFG notes the 10-year Gilt yield since the end of August surged by 170bps at the worst point of the crisis but is now just 20bps higher.

The U.S. ten-year Treasury bond yield spread over the ten-year Gilt yield was 40bps at the end of August but is now closer to 70bps.

Mann meanwhile said the premium was still reflected in currency markets, which if correct, suggests further potential for Sterling upside if further uncertainty is 'priced out'.