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Pound Jumps as Carney Signals Rates May Rise Sooner Than Planned

The pound strengthened for the first time in four days after the Bank of England signaled that policy makers may consider increasing interest rates sooner than they previously forecast as the economy improves.

Sterling rose versus all of its 16 major peers as the central bank said in its quarterly Inflation Report that the jobless rate is more likely than not to fall to the 7 percent threshold that will lead it to consider raising borrowing costs in the third quarter of 2015. It previously predicted that would only happen in the second quarter of 2016. Separate data showed the U.K. unemployment rate declined. U.K. government bonds were little changed.

“Both the Bank of England’s new projections and the development in terms of employment should be positive for the pound,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The pound has room to strengthen further although some may argue that a lot of that has already been in the price.”

Sterling strengthened 0.7 percent to 83.89 pence per euro at 4:13 p.m. London time after weakening 0.8 percent yesterday. The pound jumped 0.6 percent to $1.5993 after falling to $1.5855 yesterday, the lowest level since Sept. 13.

Bank of England Governor Mark Carney tried to temper the more optimistic outlook by saying 7 percent is a “staging post” and not an automatic rate-increase trigger, promising that policy will remain loose until the Monetary Policy Committee is certain the recovery is assured.

‘Continued Support’

“When the threshold is reached, the MPC will set policy to balance the outlook for inflation against the need to provide continued support to the recovery,” he told reporters at a press conference in London.

The U.K. currency gained 5.4 percent in the past six months, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro climbed 4.1 percent and the dollar rose 0.3 percent.

The jobless rate as measured by International Labour Organisation standards declined to 7.6 percent, the lowest since 2009, from 7.7 percent in the three months through August, the Office for National Statistics said in London.

Short-sterling futures fell as investors increased wagers that interbank borrowing costs will increase.

The implied yield on contracts expiring in December 2015 climbed one basis point to 1.42 percent after increasing as much as eight basis points. The rate dropped to 1.21 percent on Oct. 31, the lowest level since Aug. 12.

Higher Projections

“Sterling remained generally supported after the BOE Inflation Report signaled that rate hikes could come a year earlier than previously expected on the back of improving outlook for employment and growth,” Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup Inc. in London, wrote in a research note. “The BOE GDP forecasts are still well above market consensus and could encourage the street economists to revise up their own projections.

In their first Inflation Report since Carney introduced forward guidance on the future path of interest rates in August, policy makers also reduced the near-term prediction for inflation. They now see consumer-price increases slowing to just below the central bank’s 2 percent target by the first quarter of 2015.

The central bank left its asset-purchase target at 375 billion pounds and its benchmark interest rate at 0.5 percent at its most recent meeting on Nov. 7.

Slower Inflation

The pound fell the most in a week against the dollar yesterday after a government report showed inflation slowed more in October than economists forecast, damping bets the central bank will raise borrowing costs.

The 10-year gilt yield was at 2.80 percent after rising to 2.85 percent, the highest since Oct. 16. The price of the 2.25 percent bond maturing in September 2023 was 95.325.

The extra yield that investors demand to hold 10-year gilts instead of similar-maturity German bunds expanded five basis points, or 0.05 percentage point, to 1.07 percentage points, set for the highest close since October 2005.

The five-year break-even rate, a gauge of inflation expectations derived from a yield gap between gilts and index-linked securities, shrank two basis points to 2.77 percentage points, the narrowest since Sept. 2.

Gilts handed investors a loss of 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.6 percent and U.S. Treasuries declined 2.8 percent.

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