Economy

Sterling jumps to one year high after inflation bounce

Sterling jumps to one year high after inflation bounce”

The Brexit-battered pound hit a 14-month high against the dollar on Friday as a Bank of England policymaker reiterated the possibility of a looming interest rate rise.

Most members of its Monetary Policy Committee are anxious that uncertainty about Brexit will hurt the economy, which slowed sharply in the first half of 2017, and they have so far held off on voting for raising rates. Meanwhile, Russia and Belarus are set to begin a week of strategic military exercises on Thursday.

Market participants saw the currency shift as a realisation that a rate hike was likely, given that inflation is tipped to hit 3% before next year.

"We believe it is highly unlikely that the MPC will raise rates in the next two years given ongoing Brexit uncertainties", said Mike Riddell, a fixed income portfolio manager at Allianz (DE:) Global Investors.

The Bank's monetary policy committee was split, with Michael Saunders and Ian McCafferty calling for an immediate rise to 0.5% to keep rising inflation in check. The yield on two-year United Kingdom government bonds climbed 6 basis points to 0.44 percent.

Two statements stand out, the first that the market is under-pricing the risk of a rate rise.

The Bank of England ramped up its hawkish rhetoric on Thursday, warning that an increase in interest rates could happen within months if the economy performs as officials expect.

'It is clear the committee has run out of patience with market-based rate expectations - the economy has performed in line with bank forecasts, while the labour market has tightened.

United Kingdom inflation surged to 2.9%, more than forecast and way above the Bank of England's 2% target, as households paid more for fuel and clothing.

Craig Erlam, senior market analyst at Oanda, said: "It seems policy makers are not willing to wait and see whether the above-target inflation is in fact transitory or if it has become more ingrained but I guess the actions taken past year allow them the opportunity to act while remaining as accommodative as they were prior to the Brexit vote". The Bank said any increase would come at a gradual and limited pace.

"The evolution of the data is increasingly suggesting that we are approaching the moment when the bank rate may need to rise", Vlieghe said in a speech at the Society of Business Economists in London on Friday.

"However, once last August's emergency cut has been reversed, the more dovish members of the MPC are likely to want to see actual evidence of cost pressures building before embarking on a more sustained tightening cycle".

The Bank of England's inflation target is 2%.



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