Pound Sterling Lifted after BoE Dove Vlieghe Hawks More Rate Rises

- Pound boosted by as Gertjan Vlieghe hawks sustained tightening.

- Comments come as Brexit transition cleared at EU Council. 

- Economists expect three rate rises in 2018 and two in 2019. 

© Bank of England, Pound Sterling Live

The Pound was boosted during late morning and noon trading Friday after the Monetary Policy Committee member Gertjan Vlieghe told an audience at a Confederation of British Industry (CBI) event the current robust state of the UK labour market probably warrants a sustained tightening cycle from the Bank of England (BoE).

“Provided the balance between global tailwinds and Brexit headwinds remains where it is now, supporting UK growth at or above potential, and provided evidence continues to accumulate that a tight labour market is actually pushing up domestic inflationary pressures, I expect that Bank Rate will need to rise further over the forecast period,” Vlieghe said, in a speech, Friday. “The current central outlook is, in my view, consistent with one or two quarter point rate increases per year over the forecast period.”

The UK labour market is approaching, if not already at, what the Bank of England describes as full employment. This is after the unemployment rate fell back to a 42 year low of 4.3% during the three months to the end of January while wages were shown rising at a much faster than expected pace. This was seen at the time as likely to spur more hawkish rhetoric from the BoE given that wage growth can exert upward pressure on inflation.

Vlieghe, an external member of the BoE’s rate setting committee, was among the final members to back the idea of an interest rate rise in November 2017 and has previously been seen as one of the MPC’s more “dovish” members. The BoE raised the base rate for the first time in a decade back in November, taking it up by 25 basis points to 0.50%, citing inflation of 3% and the need to return the consumer price index to the 2% target.

Friday’s comments are significant for the Pound because pricing in interest rate derivatives markets, which enable investors to hedge against changes in rates while providing insight into expectations for monetary policy, implies a Bank Rate of just 0.83% in November 2018. This suggests markets expect at least one rate hike in the year following the last one but are not quite convinced about the prospect of a second.

“With another hike in interest rates in May now largely priced into markets (and supported by this week’s Monetary Policy Committee (MPC) Minutes), the bigger question is just how “limited and gradual” the rise in interest rates will be thereafter,” says Paul Hollingsworth, a senior UK economist at Capital Economics.

The Pound-to-Dollar rate was quoted 0.29% higher at 1.4152 during late noon trading Friday while the Pound-to-Euro rate was up 0.17% at 1.1469. Both had traded higher during the morning session.

Friday’s statement from Vlieghe comes after the European Council voted to approve a transition agreement between the UK and European Union, which will ensure the status quo remains in place during the 21 months between March 2019 and December 31, 2020 when the UK government hopes to have a future trade agreement in the bag.

The government says the deal will provide certainty to businesses about the future trading relationship and circumvent a so called cliff edge Brexit where companies have only limited time to prepare for any procedural changes. It has been claimed that such uncertainty and its associated cliff edge would lead companies to shutter operations in the UK or relocate parts of them to the continent.

Comments from Vlieghe and talk on transition follow Thursday’s Bank of England monetary policy decision, which was seen as providing confirmation that it will raise interest rates for a second time in May but lacking any meaningful signals of what might come after that.

“Markets are only pricing in three hikes over the next two years, which seems exceptionally low compared to the pace and the overall amount of tightening seen in previous cycles. With the economy holding up relatively well, the MPC less tolerant now of above-target inflation than in the recent past, and a desire to return interest rates to some new “normal” level, we think that interest rates will rise three times this year, and twice further in 2019 – more than markets expect,” Hollingsworth adds.

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