Pound Advances as BOE Officials See Risks Building for Inflation

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Carney Seen 'Putting a Timeline' on BOE Rate Move

Pound bulls found enough to keep them happy in the minutes of the Bank of England’s July meeting, even as policy makers voted unanimously to keep interest rates at a record low.

Sterling climbed against all 16 of its major counterparts on Wednesday as the minutes showed a growing number of the nine Monetary Policy Committee members had become concerned inflationary pressures are rising. The central bank also said that if the crisis in Greece were excluded, the decision of whether to raise the benchmark rate from 0.5 percent was becoming “more finely balanced.”

“It may well be that come the August meeting what we actually see is maybe two or three members voting for a hike,” said Sam Hill, senior U.K. economist at RBC Capital Markets in London. “The minutes do point to the theme that the MPC could be gearing up for a hike as soon as November this year. On that basis it’s possible that sterling continues to be supported by the message that the MPC is sending.”

The pound appreciated 0.4 percent to $1.5625 as of 4:29 p.m. London time, halting a four-day decline. Sterling strengthened 0.8 percent to 69.72 pence per euro after advancing to 69.36 pence on July 17, the strongest level since 2007.

The pound was climbing even before the minutes on Wednesday after BOE policy maker David Miles said in an interview that it’s “very likely that we will move back up to target level” for inflation “quite sharply towards the end of this year or the start of next year.”

‘Gradual’ Increase

Any interest-rate increases will be “gradual,” Miles, whose term on the MPC ends in August, said in an interview with Mortgage Strategy magazine. At an event in London late Tuesday, BOE Governor Mark Carney said investors should keep the headwinds facing the U.K. economy in mind as the central bank considers raising rates from a record low.

Investors expect rates to rise next May, compared with August 2016 as recently as July 10, according to forward contracts based on the sterling overnight index average, or Sonia. Futures showed a 73 percent chance the U.S. Federal Reserve will increase its benchmark rate by December, according to data compiled by Bloomberg.

Carney used two public appearances last week to prepare investors for higher borrowing costs. On July 16, he said the timing for an increase will become much clearer by the end of the year, while both Carney and Miles said two days earlier that the time was approaching to raise the key rate from the level it’s been at since March 2009.

Best Performer

The pound has strengthened 7 percent in the past three months in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the best performance in the group.

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The yield on U.K. 10-year gilts fell six basis points, or 0.06 percentage point, to 2.03 percent on Wednesday. The 5 percent security due in March 2025 rose 0.54, or 5.40 pounds per 1,000-pound face amount, to 125.835.

The yield difference, or spread, between two- and 10-year securities narrowed six basis points to 138 basis points. The greater proximity, also known as a flatter curve, is a sign investors are pricing in a slower pace of rate increases.

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