British Pound Surges as Bank of England Eyes Interest Rate Rises

“Sterling rose following the BoE report and was dealing around a cent higher against both the dollar – close to a 1-month high – and a similar amount against the euro, close to the 7-month high.” – Andy Scott at HiFX.

As global central banks race to cut interest rates to prop up their economies the Bank of England and US Federal Reserve stand apart with their desire to raise rates.

The Bank of England told markets in their Quarterly Inflation Report that the intention to raise rates from record lows in coming months remains.

Governor Mark Carney stated that the first interest rates rise is likely in 2016, sooner than expected, and despite the fact that inflation is set to turn negative in spring, the Bank raised the UK’s GDP forecasts.

“Given the recent action by a number of central banks to loosen monetary policy in response to weak demand and falling rates of inflation or deflation, today’s inflation report was slightly more hawkish than expected,” says Andy Scott, associate director of FX advisory services at foreign currency specialists HiFX.

Scott notes that the stance at the BoE makes it an outlier in terms of its policy direction, particularly considering recent easing by the ECB.

Elsewhere, negative rates are on offer in Denmark, Switzerland and Sweden.

“Sterling rose following the BoE report and was dealing around a cent higher against both the dollar – close to a 1-month high – and a similar amount against the euro, close to the 7-month high reached earlier this week,” says Scott.

Scott does caution that the UK economy may not be shielded indefinitely from the weaker growth being seen elsewhere, including in China, which might only be a direct concern for luxury goods makers, but which has an overall impact on global sentiment.

Dennis de Jong, managing director at UFX.com says:

“There was a warning that deflation is imminent and that the interest rates could well be cut. More quantitative easing would then be in order and, although the UK is not as exposed as it was to Greece a few years ago, a Greek exit from the euro would impact on the Bank of England’s forecasts.”  

Outlook Remains Positive for British Pound

With the Bank of England sticking by its plans to raise rates, albeit at a point that’s been continually pushed out further into the future, sterling will remain strong.

In particular, HiFX reckon the GBP is likely to fair well against currencies where interest rates are being cut, such as Australian dollar and the Swedish krone.