The Pound Surges to a Post-Brexit High

  • Markets now see two rate increases by the end of next year
  • Time for a rate increase approaching, BOE policy maker says

Schroders' Van Steenis Says BOE Behind the Curve

The pound climbed to the highest level against the dollar since just after the Brexit vote and U.K. government bonds tumbled as Bank of England policy maker Gertjan Vlieghe stoked speculation of an interest-rate increase within months.

Sterling surged past $1.36 after Vlieghe, considered a dovish voter, turned hawkish to tell a conference that the moment was approaching for a rate hike. The premium to hold call options on the pound relative to puts rose to the widest since 2009, as markets moved to price two rate increases next year.

The pound is the world’s best-performing major currency this month as the central bank’s comments suggest it’s willing to look past sluggish wage growth to remove the monetary stimulus put in place after last year’s Brexit vote. Its performance contrasts with a slide caused by a Europe-linked crisis 25 years ago on Sept. 16, 1992, when Britain tumbled out of the Exchange-Rate Mechanism on a day known as “Black Wednesday.”

“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. If the economy continues apace, “the appropriate time for a rise in the bank rate might be as early as in the coming months.”

BOE Roundup: Hike Seen More Likely But Two May Be a Step Too Far

Sterling rose 1.5 percent to $1.3597 as of 4:10 p.m. in London, having reached $1.3616, its highest level since June 24, 2016, the day after the Brexit vote. The pound strengthened for a sixth day versus the euro, gaining as much as 1.4 percent to 87.74 pence.

Vlieghe’s comments sent yields on two-year U.K. gilts up seven basis points to 0.45 percent, having earlier touched 0.49 percent, the highest since June 23, 2016. Benchmark 10-year gilt yields rose as much as 11 basis points to reach 1.34 percent, a level not seen since Feb. 6.

Money markets are now pricing a more than 75 percent chance of a rate increase in November, with a 25-basis-point rise fully priced for February and a second one by December 2018. Some currency analysts said two hikes might be a step too far given the uncertainty over Brexit and the economic outlook.

“I appreciate that the MPC has made it clear that they want to reverse the August 2016 cut and that one rate hike is a distinct possibility, but I am skeptical given growth is not that strong that the MPC will be rushing into a second hike -- look how long it took the Fed to hike twice,” said Societe Generale SA strategist Jason Simpson.

Data this week showed U.K. inflation approaching a five-year high, while unemployment was low. Wages remained subdued but with a tighter labor market and the potential for domestic price pressures, the hawks may want to get ahead of the curve. Next week, Prime Minister Theresa May will outline her Brexit strategy in a speech in Florence.

“The important question now is what the MPC means with ‘over the coming months’,” said Commerzbank AG strategist Lutz Karpowitz in a research note published before Vlieghe’s comments. “The longer this period is going to be, the higher the risk that the economy starts cooling, thus taking the pressure off the BOE.”

— With assistance by Anooja Debnath, and Stephen Spratt

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