Pound Jumps as BOE's Haldane Sees Case for Raising Rates Soon

  • Sterling earlier fell to lowest since PM May called election
  • Money markets price in higher chance of 2017 rate increase

AllianzGI CEO Says Pound Has Probably Bottomed Out

The pound jumped, reversing an earlier decline, after Bank of England chief economist Andy Haldane said that the risks of leaving policy tightening too late are rising and that he considered voting for an interest-rate increase this month.

Read more: BOE’s Haldane Sees Case for Raising Interest Rates This Year

U.K. government bonds declined after Haldane’s remarks, while money markets moved to price in a more than 50 percent chance of a 25-basis-point hike by the end of 2017, from 21 percent on Tuesday. Sterling was set for its biggest daily climb in a week against the dollar, after earlier reaching the lowest level since the day Prime Minister Theresa May called this month’s election.

The pound’s rally after the comments by Haldane, usually on the more dovish side of the BOE’s Monetary Policy Committee, is another example of how the currency has been buffeted by a growing split among policy makers. It climbed on June 15 when minutes of officials’ June meeting showed two MPC members unexpectedly joined Kristin Forbes in calling for higher rates, and tumbled Tuesday when Governor Mark Carney signaled he wasn’t in a hurry to raise interest rates any time soon.

Haldane’s comments imply he “looks set to replace Forbes on the hawkish side,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA. “For the pound, it does show that after the MPC vote, then Carney’s comments and now Haldane, that rate expectations are a driver in the short term. They are unlikely to go lower, and hence bias is for chatter to be pound positive, but in the medium term there is always the economy and Brexit for the pound to focus on.” 

The pound was up 0.6 percent at $1.2706 as of 1:48 p.m. in London. It earlier dropped to $1.2589, the lowest since April 18. Sterling strengthened 0.5 percent to 87.76 pence per euro. Two-year gilt yields climbed eight basis points to 0.21 percent, while those on benchmark 10-year gilts rose four basis points to 1.04 percent.

The divergence among policy makers is only adding to the currency’s volatility as traders grapple with Britain’s exit from the European Union and an inconclusive election that has left the longevity of May’s premiership in doubt. Queen Elizabeth II outlined the legislative program of May’s government in Parliament, which was heavily focused on Brexit.

ING Groep NV foresees a “very messy domestic political situation” keeping the pound “on the back foot,” with cable set to move lower to $1.25, strategist Chris Turner wrote in a note before Haldane’s comments.

— With assistance by Marton Eder

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