Pound sterling jumps as Bank of England signals interest rate rise in 'coming months'

The pound rose close to its highest level against the dollar in a year

Like last month, the minutes showed that only two of the bank’s nine policy makers had voted for an immediate increase in rates. That initially sent the pound lower (Thomson Reuters Eikon)

The pound jumped by over one cent against the US dollar on Thursday after the Bank of England indicated that interest rates would be hiked for the first time in over a decade within the “coming months”.

Immediately after the Bank released the minutes from its latest meeting, sterling jumped to above $1.33 against the dollar, close to its highest level in a year. It rose to its highest level against the euro since late July.

Like last month, the minutes showed that only two of the bank’s nine policy makers had voted for an immediate increase in rates. That initially sent the pound lower as some analysts had expected a greater split, but the currency quickly reversed course as investors digested the rhetoric indicating that the monetary policy committee is gearing up for a move soon.

“Whilst no additional members joined [Michael] Saunders and [Ian] McCafferty in voting for a rate hike this month, the signs of rising dissent amongst the MPC will heighten speculation of a more hawkish bank going forward, particularly should inflation continue to accelerate,” said Alexandra Russell-Oliver, a currency analyst at Caxton.

“This in turn may provide sterling with additional opportunities to strengthen, despite ongoing Brexit uncertainties,” she said.

Higher interest rates generally tend to support currencies.

The FTSE 100 stock index of the UK’s biggest traded companies, turned lower on the news and ended the session down 1.1 per cent. It’s packed full of multinational firms that generate substantial portions of their revenue abroad, meaning that a weaker pound tends to boost them and a stronger pound weigh on their shares.

Over the longer term, however, forecasters said that the pound could still be in for a turbulent ride, especially considering the uncertainty around Brexit negotiations.

“Sterling has come a long way in the last few trading sessions, which appears justified given that the hurdle for the Bank of England to hike rates seems to be coming down,” said Dean Turner, an economist at UBS Wealth Management.

“However, the track ahead presents obstacles on the political front. Theresa May is likely to reinforce her Brexit credentials in her speech next Friday and at the Conservative Party Conference, so let’s not get too carried away with the current rally,” he said.

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