UK Interest Rate Rises May Happen in 2016 Hints Broadbent

The pound sterling retains a positive bias thanks to hints that markets are being too conservative in their expectations on the timing of the UK's first interest rate rise in years.

We have just had some undeniably positive comments come through from one of the most influential people in in the UK foreign exchange space - Ben Broadbent, picture above.

Broadbent sits on the Bank of England’s Monetary Policy Committee and is therefore part of that elite which sets UK interest rates which in turn influence the pound.

Broadbent has told a Reuters Newsmaker event that the money markets are being too complacent on when they are pricing in that elusive first interest rate at the Bank of England.

This is significant as the pound suffered between August and November as markets pushed back their timing of the first rate hike.

If Broadbent has dropped a hint that the rate will happen earlier than the markets are expecting, then we would expect the pound sterling to find further positive momentium.

Markets are only pricing in a 25 basis-point increase at the Bank of England to happen in early 2017.

They may be overly pessimistic says Broadbent:

"Even relatively moderate changes in forward rates, prompted by unexceptional news about the economy, can result in big shifts in the date at which the yield curve first reaches some particular level," he said.

"But that doesn't mean the Bank of England’s views about future policy, over the medium term, have moved so dramatically. If nothing else, this demonstrates the problem with focusing too obsessively on that particular date."

Broadbent also said markets should not obsess over weak inflation, as has been the case of late, and focus on broader economic indicators which are undeniably pretty at present.

In sum, we ask if Broadbent may be suggesting that the Bank will raise interest rates in 2016? Economists don’t need convincing on this point but money markets may have to play a game of catch-up.

If they do and opt to bring forward their pricing on UK interest rates then the pound exchange rate complex could move notably higher over coming weeks.