BoE Helps Pound Sterling with Fresh Hints of May Rate Rise

Above: Mark Carney © UK Parliament, Pound Sterling Live

The British Pound enjoyed a steady recovery during the course of an appearance by Bank of England members before UK parliamentarians in which expectations for an imminent interest rate hike were confirmed.

Britain's interest rates will rise gradually but Brexit remains the biggest uncertainty to this expectation, Governor of the Bank of England Mark Carney told a sitting of the UK Parliament's Treasury Select Committee.

The Treasury Select Committee were questioning Carney and a number of his colleagues on the Bank of England's February Inflation Report at which the Bank struck a more confident tone as to the future direction of UK economic growth.

The February monetary policy meeting - the minutes of which were released alongside the Inflation Report - saw the Bank indicate: "Monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report."

The Pound rose in response to the developments in February and it appears there has been some further support to be had for the currency following the Bank of England's outing to Westminster.

The Pound staged a steady comeback against the Dollar and Euro through the course of the appearance, having endured weakness earlier in the day with markets taking an apparently dim view to wage and employment data released in the morning session.

Above: The Pound recovers against the Euro over the course of the Treasury Select Committee grilling of Bank of England MPC members.

The suggestion that interest rates will rise confirmed market expectations for a May interest rate rise; an outcome that has been expected since the Bank delivered its February policy decision and Inflation Report.

"Our current forecast is for 25bp interest rate hikes in May (to 0.75%) & November (to 1.00%). Carney says market odds for rate rise now in line with data," says Howard Archer at EY Item Club.

It is "clear that BoE guidance is 'Brexit-contingent'," says Viraj Patel, a foreign exchange analyst with ING Bank N.V. Patel agrees an interest rate rise is coming in May and believes this is still a "positive GBP story".

Above: Andy Haldane © UK Parliament, Pound Sterling Live

Also appearing before the committee was Andy Haldane, Chief Economist and Executive Director of Monetary Analysis & Statistics at the Bank of England, who says the big danger to jobs is a central bank which is forced to "step on the brakes" and raise interest rates in a aggressive manner in response to booming inflation. Therefore interest rates should be raised slowly but surely.

i.e. the Bank must not be afraid to raise interest rates in current conditions. Indeed, some commentators have argued that Haldane has made the case for a string of interest rate rises to be made sooner than his colleagues are suggesting.

Haldane also confirms wages are expected to rise to hit the 3% mark and a maximum of 3.5% being hit in about three years time.

"If markets are hinging their #BoE policy bets on wage growth data - the Bank's Chief Economist has just told us that we may get a 3% handle soon (partly good reasons, partly statistical reasons). Guess #GBP investors don't want to be late to the BoE hawkish re-pricing party," says Patel.

However, Haldane warns Brexit remains the single largest downside risk to these trends.

At the time of writing the Pound-to-Euro exchange rate is quoted at 1.1340, having been as low as 1.1289 earlier in the day. The Pound-to-Dollar exchange rate is quoted at 1.3977 having been as low as 1.3907.

Strategist Saktiandi Supaat with Maybank in Singapore says the BoE’s explicit willingness to tighten monetary policy earlier than expected leads him to maintain an "optimistic view on GBP outlook and look for opportunities on dips to buy into".

There were two clear messages from the testimony, both of which back up our view of the next rate hike coming in May, which
will be followed by another in November. Firstly, domestically generated inflation risks are building through growing evidence of wage inflation “taking root”. Secondly, that because of this the degree of monetary tightening is likely to be more than what was expected at the last QIR release in November," says Derek Halpenny, an FX strategist with MUFG based in London.

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