The pound rose against both the euro and the US dollar after the Fed’s decision yesterday to raise interest rates a further 75 basis points. Ahead of next week's Bank of England policy update, and with limited economic news, the pound will be influenced by broader market sentiment.

While the Fed’s decision was anticipated, the guidance provided has relieved markets as the Fed doesn’t intend to accelerate the pace of rate hikes. This, however, did not offer support to the US dollar.

The pound could strengthen further if the positive market sentiment continues over the coming weeks, analysts have noted.

The Fed adds more pressure on the Bank of England

The Fed’s rate hike of 75bps for a second straight month has added more pressure on the Bank of England. The BoE will have to act more forcefully to combat rising prices.

The US central bank kept up the fast pace of interest rate increases and promised to raise borrowing costs even further despite concerns about a slowdown in the economy. It is the first time US rate-setters have decided on such drastic rate hikes and analysts point out that their move would force other central banks to act.  

While the Fed will start to slow their rate hike cycle as demand has dropped, Fed chairman Jerome Powell has signalled that further US increases will be coming soon.

With real GDP shrinking as it was revealed on Thursday, due to rising inflation, economists have argued that the Fed should have tightened much more quickly, much earlier on. The mistake now will be for the Fed to back off tightening and allow stagflation to persist. What is clear now is that the primary goal for the Fed is the need to reduce inflation, which perhaps is what other central banks need to realise too.

This draws attention to the Bank of England, which is now under pressure to curb inflation, especially as the elections begin for the party’s next leader.

Bank of England interest rate rise

The Bank is considering a 0.5 percentage point increase ahead of its meeting next week. This will be the biggest rate hike in almost three decades.

The BoE, the Fed and other major central banks face a difficult task as they need to tame inflation while not throwing their countries into a potential recession. Powell said the US is not currently in recession but stated there are growing signs of a slowdown as monetary policy tightens.

A Reuters poll of economists found that the Bank of England (BoE) will likely avoid a bigger interest rate rise on the 4th of August and instead stick to the more moderate 25 basis point increase it has been delivering. There was speculation that the BoE would deliver a larger rate hike based on Governor Andrew Bailey’s recent comments of a half-point hike being a possibility.

A majority of respondents expect Bank Rate to be at 2.25% or higher, compared with 1.75% in the previous poll. The poll gave a median 55% chance of a recession in the coming year, with 30% economists seeing at least two consecutive quarters of contraction.

11 of 18 respondents said the current cost of living crisis would persist for over a year before it eased significantly.

Whether the Bank of England will deliver a 50 basis point rate hike next Thursday or a smaller one, many analysts argue that the window for further hikes is closing, as recession fears have increased.

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Central banks raise interest rates to control rising prices - or inflation. When interest rates go up, economic activity slows, and unemployment often rises. Higher interest rates increase the cost of borrowing and encourage people to save more. While mortgage payments go up, savers gain. By raising interest rates, people spend less, which helps to push inflation down.

Therefore, if a central bank feels inflation is rising too quickly, it may try to control it by raising the base rate and pushing up interest rates.

Stronger currency

As interest rates rise higher, the currency of the specific country strengthens on the foreign exchange markets, and that helps to reduce the price of imported goods.

Decisions, Decisions: When do Central Banks decide to act?

As the Governor of the Bank of England (BoE) Andrew Bailey has mentioned, deciding when to act and how much further to raise interest rates is a delicate balancing act. The BoE must tread a “narrow path” between taming high inflation and supporting the economy.

The reason for saying this is that if a Central Bank raises rates too far, too fast, will further unsettle the fragile economic recovery and tip the country into a recession.

Central Banks raising interest rates to curb inflation

At the moment, central banks around the world are pushing for the sharpest rise in interest rates in decades in response to soaring inflation. With living costs across advanced economies rising at the fastest rate per year since the 1980s, the US Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) are taking aggressive action to ease inflationary pressures.

Reasons that inflation has risen dramatically

  1. The impact of the Covid pandemic
  2. Supply chain disruption
  3. Worker shortages
  4. Russia’s war in Ukraine driving up energy prices.

Inflation across the OECD group of wealthy nations has reached 9.2% which is the highest since 1988. Britain has the highest rate in the G7 group of rich countries with inflation hitting 9% in April, the highest since 1982.

Inflation target

Central banks have mandates from their national governments to target low and stable inflation, typically of around 2%, while also considering the health of the economy and outlook for jobs.

When central banks aggressively raise rates to control inflation, they hope to show how committed they are to bring inflation back to their target. They want to prevent expectations that higher inflation will become embedded as workers would start demanding higher pay or companies would keep putting up their prices.

How higher interest rates affect you?

When a central bank raises interest rates, high street lenders pass these increases on to consumer and commercial borrowers and savers which can result in higher mortgage costs.

If you have a mortgage with standard variable rates, you will see the difference. With those on fixed-rate mortgages, the higher costs will become apparent when you come to the end of your term. For example, analysts at Hargreaves Lansdown estimated that, when the Bank raised interest rates in May by 0.25 percentage points to 1%, mortgage payments would have gone up by over £40 per month.

If you are renting, buy-to-let landlords could pass on higher borrowing costs to you.

What are the dangers of higher interest rates?

Economic growth could stall if there is weak consumer demand. With living costs already hitting consumers’ spending power, this could worsen the risk of recession.

Britain’s economy is forecast to slow to a halt next year, with the country expected to fall to the bottom of the OECD’s growth league table, just above Russia.

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The pound is extremely sensitive to global market sentiment and concerns over a slowdown in UK economic growth in the coming months. Investors fear that this will also influence the Bank of England’s monetary policy decisions and could diminish expectations for future interest rate hikes.

The pound fell as higher oil prices resulted in a stock market selloff. Chancellor Rishi Sunak’s Spring Statement also contributed to the pound’s weakness as it offered a disappointing assessment of the UK economic outlook. The Chancellor said that “The actions we have taken to sanction Putin’s regime are not cost-free for us at home. The invasion of Ukraine presents a risk to our recovery as it does to countries around the world.” After the Spring Statement announcement, the chancellor has been criticised for failing to help those who are out of work and on lower incomes.

1.3 million could fall into poverty

The Chancellor’s Spring Statement on Wednesday has attempted to alleviate some of the pain from rising prices by providing some tax cuts, including a 5p-a-litre off fuel duty and a £3,000 increase in the limit for national insurance payments. However, it was criticised for failing to support poorer families and vulnerable groups from the rising cost of living. According to new analysis of Wednesday’s Spring Statement by the Resolution Foundation, around 1.3 million people will fall into absolute poverty in the next year. Typical working-age household incomes will drop by 4 per cent in real-terms next year (2022-23), a loss of £1,100. The poorest quarter of households could see their incomes drop by 6 per cent.

The Institute for Fiscal Studies noted that the Spring Statement omitted "anything for those subsisting on means-tested benefits", who will be dealing with the cost of living increases of about 10% "but their benefits will rise by just 3.1%." Paul Johnson, the Director of the institute told a news conference: "His choice to increase national insurance rates and reduce the basic rate of income tax looks, to me at least, indefensible from an economic point of view - though one can see the political attractions."

Ukraine

The pound has been very sensitive to news regarding the war in Ukraine but hopes for a ceasefire have helped markets recover. Investors have also come to terms with the situation and do not expect a further escalation.

The pound is forecast to continue to strengthen as the situation in Ukraine improves, but any unpredictable turn of events could create currency volatility.  

Energy prices and the currency market

Oil prices have been surging and this creates more risks to global economic growth and increases volatility. Currencies such as the pound and euro, for example, that belong to countries that are net importers of energy have been especially sensitive when energy prices rose. On the other hand, currencies such as the Australian, New Zealand and Canadian dollars which belong to countries that are energy and commodity exporters have strengthened. Safe-haven currencies like the Swiss franc and US dollar have also strengthened.

According to Barclays’ research, the UK is the most energy sufficient currency out of the G10 currencies as it produces 71% of its primary energy consumption needs, with over 80% of the UK’s natural gas imports coming from Norway, and only 15% from Russia. While it is affected by the surge in energy prices, it is not as much affected as other European countries. The OBR said that “higher global energy prices will weigh heavily on a UK economy that has only just recovered its pre-pandemic level.”

Rishi Sunak has pointed out that the Government could intervene on energy bills before the autumn if bills rise sharply again in October. He told BBC Radio 4’s Today programme: “Yes, of course we’ll have to see where we are by the autumn and it’s right for people to recognise that they are protected between now and the autumn because of the price cap.” He added: “I always keep everything under review, and the Government, as it’s shown over the past two years, is always responsive to what’s happening. But I would say with energy prices, you know, they are very volatile, and I don’t think you, I or anyone else has any certainty about what will happen in October right now.”

BoE and interest rates

The ongoing rise in inflation could push the BoE to raise interest rates further, however, the Bank could also exercise some caution as higher rates could slow down economic growth. The currency market is currently pricing in up to 130 points of rate hikes in 2022, but some analysts say the Bank will fail to meet market expectations.

If rate expectations continue, then the pound will remain supported but if any such expectations are cut then the pound will fall. Some analysts have noted that the pound could go lower against the euro if the market raises its bets that the European Central Bank (ECB) will tighten policy at the end of 2022.

 

The pound has slightly dropped from its over two-month high which it reached this Wednesday, but the outlook remains positive with traders expecting additional gains. Researchers at Barclays also anticipate the pound to continue outperforming its major peers over the coming months.

The pound’s retreat today was not driven by any specific economic factor and could be attributed to traders readjusting their trades ahead of the all-important US consumer inflation figures.

Pound’s positive performance could continue researchers say

Markets generally believe that the pound’s strong performance in the first week of the new year was largely driven by expectations for a February interest rate hike and this could continue in the coming weeks and months.

The market now expects a ~75% chance of a second rate hike at the BoE’s February  policy meeting. This has also been further boosted by expectations that the US Federal Reserve will proceed to a faster and earlier interest rate hike cycle in 2022.

With inflation rising in both the UK and the US, markets expect higher interest rates in the US and the UK, which will support the British currency.

UK retail sales

The latest annual Retail Sales Monitor report from the British Retail Consortium (BRC) showed that sales grew, but consumer spending slowed the final weeks of 2021. The British Retail Consortium said that UK retail sales grew by 2.1% in December with growth coming in at 9.9% year on year. Government restrictions slowed spending, but in general the Omicron variant did not have a massive impact as retail sales held up through December. However, January is expected to be a more difficult month for the high street with footfall at UK outlets seen lower in the first week of January.

Businesses in the retail sector have warned that the spread of Omicron and the increasing costs of living could have a significant impact on sales this year.

Bank of England interest rate hikes

While a February rate hike would be the second interest rate rise in just two months, the total number of hikes to be delivered in 2022 is yet unknown and will be a crucial factor in the pound’s performance.

The Bank of England's unexpected December rate hike has led the market to believe that there will be more near-term rate hikes. As it becomes clearer how the Bank is expected to act and how many rate hikes will be delivered over the coming months, the pound will gain further support.

With the Omicron variant slowly subsiding and markets regaining optimism the British currency will also gain traction. As BBC reported on Wednesday, Covid cases in the UK are decreasing according to the daily figures released by the government, with the number of cases confirmed over the past seven days having fallen 13% compared to the previous week.

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The pound found support on Tuesday due to a weaker US dollar and improving market sentiment. Fears about the new Omicron Covid variant began to ease and helped to improve the overall market sentiment.

With no negative Brexit-related news, and rising expectations for a rate hike by the Bank of England in December, the pound will remain supported. Apart from this, limited demand for the US dollar will also provide some impetus to the British currency.

Omicron fears ease

News that the Omicron symptoms are mild have helped ease fears regarding the economic effects from the new variant and boosted investor confidence. Equity markets were buoyed but the US dollar’s status as a safe haven was undermined. Expectations that the Fed will proceed to tighten policy and raise interest rates sooner than later has helped to limit losses for the dollar.

Advanced vaccine booster programme

The UK’s advanced vaccine booster programme has also injected markets with hope as analysts believe that the UK’s programme might mean that harsh restrictions might not be necessary. If the UK succeeds with its booster programme and protects the majority of the population, then this could benefit the pound.

As mentioned earlier, markets and the pound will become more positive once more news is announced about the efficiency of vaccines against the Omicron variant. Pfizer is expected to offer some research findings before the weekend.

More particularly, for the pound, what matters is also the government’s response to the number of cases which is currently rising. Markets will watch closely any news from the Prime Minister and how he will deal with the incoming data about the virus and vaccines. There is still much uncertainty about how strong and dangerous Omicron is and how it may be able to infect people despite vaccine protection.

Since the new variant was first detected, global markets have fallen, and the pound posted losses against the dollar and euro as sentiment deteriorated.

Pound at the mercy of external factors

The pound has been at the mercy of global market sentiment and fears about the Omicron variant. Once things improve and it is clear that the variant is not as dangerous, then the pound will gain more support.

The Bank of England is expected to consider raising interest rates on December 16, but the Bank will also take into account the Omicron variant and its effect on the economy.

Prime Minister Boris Johnson said on Monday that over 20 million people have already got their booster jab. Health professionals are worried that the vaccine could escape the protection from vaccines. Omicron now is spreading more quickly than the Delta variant with more cases in London and the South East.

There is a general view that Omicron won’t be a big problem as its symptoms are mild, but experts remain cautious as they fear another wave of hospitalisations. Until more details are made clear about the transmissibility of the Omicron variant, the severity of disease and the effectiveness of vaccines, markets will grapple with uncertainty.

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The pound fell on Wednesday despite the UK budget statement, which was in line with expectations. There was no indication that Chancellor of the Exchequer Rishi Sunak’s budget announcement contributed to the market movement. The fall is possibly linked to a drop in the yield of long-duration UK government bonds and shows that markets expect the government to reduce borrowing in the coming years.

2021 Budget

In general, news about today’s budget statement was positive about the economic outlook, regardless of the fact that there was no fiscal stimulus announced. Sunak, said he had asked the Bank of England to remain committed to controlling inflation and keeping it low and stable, as anything above 2.0% will not be favourable in the long term. Next Thursday, with the Bank of England meeting, pound volatility will be expected.  

Rishi Sunak said that his budget delivers a stronger economy, stronger growth, public finances and employment, so that it is possible to begin building the economy post-pandemic. As he noted: “Let there be no doubt: our plan is working.”

Growth

Sunak said overall spending will increase by £150 billion, the "largest increase in a century", as the economy is expected to grow and expand 6% in 2022. The chancellor said that forecasts from the Office for Budget Responsibility (OBR) show the economy will grow by 6.5% this year, 6% next year, 2.1% in 2023, 1.3% in 2024, and 1.6% in 2025. Unemployment is forecast to reach 5.2%, down from a forecast of 12% last year.

Inflation

The chancellor said inflationary pressures are currently impacting on the UK economy and the government will make sure to support households. The Office for Budget Responsibility (OBR) is expecting inflation to be around 4% next year.

Borrowing

Sunak said that will set new “fiscal rules” for public finances. During “normal times” the state should only borrow to invest in growth while balancing everyday spending. In the current financial year 2021-22, borrowing will be 7.9% of GDP, and will fall to 3.3% in 2022.

Employment and skills

The chancellor said the government will raise government spending on skills and training by £3.8bn. The government will create a UK-wide numeracy service called Multiply to help 500,000 adults. This is part of the government’s commitment to improving lifelong learning and productivity. While a lot of this has already been announced, the 43% increase in spending is considerable.

Business taxes

The bank surcharge will be cut from 8% to 3%. Business rates will be changed to help companies and a new 12-month relief will be provided to companies to invest in their premises. The incentives are worth £750m. Sunak said that 2022’s intended increase in the business rates multiplier will be terminated. There will also be a 50% business rate discount for companies in retail, hospitality and leisure. The cut is worth £1.7bn. The chancellor highlighted that “This is the biggest single year tax cut to business rates in over 30 years.”

Taxation and universal credit

Sunak also announced that the taper rate in universal credit will be cut from 63p to 55p. This will be worth more than £2bn. The work allowance will be increased by £500.  In regards to taxes, Sunak confirmed: “By the end of this parliament I want taxes to be going down, not up.”

The reforms to the universal credit system will enable only those in work to keep more of what they own and will encourage employment.

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The pound fell following disappointing retail sales and a drop in the GfK Consumer Confidence survey, but reversed losses after the release of better-than-expected Preliminary PMI data for October.

PMI

The Markit/CIPS Manufacturing PMI for October came at 57.7, higher than the expected 55.8. The Services PMI also came at 58, higher than the 54.5 forecast and September’s reading of 55.4. The Composite PMI came in at 56.8, also above the forecast of 54 and the previous month's 54. IHS Markit’s Chief Business Economist Chris Williamson said that the flash PMI data was higher than the average of 54.0 before the pandemic and showed that the GDP grew each quarter 0.7%.

Markit reported that activity increased as the private sector growth reached a three-month high, with strong business and consumer spending. Service providers were the main driver behind the recovery. Employment numbers also rose as improved customer demand and confidence about the business outlook strengthened. Pressures from higher costs and staff shortages will however persist.

Retail Sales

Earlier on Friday, the ONS reported that UK retail sales fell in September. The pound dropped following the disappointing news, as it was shown that the economic slowdown might be worse than expected. Retail sales for September were down 2.6% year-on-year, lower than the expected 1.7%.

Even as we move into the Christmas period, higher gas prices will keep operating costs high and reduce consumer spending power.

November interest rate hike

The pound will also be at risk from the Bank of England disappointing markets and not proceeding as expected with the interest rate hikes. The markets now see a November interest rate hike (from 0.1% to 0.25%), as a 56% possibility, which is down from 90% earlier this week, after Bank of England governor Andrew Bailey suggested the BoE will have to act to control inflationary pressures.

BoE chief economist Huw Pill told the Financial Times that the Bank would have a "live" decision to make at its next meeting on the 4 November. While he declined to say how he would vote at the Bank’s meeting next month, he said "it is finely balanced": "I think November is live."

The UK interest rate has been at a historic low of 0.1% since March 2020. The view that November’s meeting is “finely balanced” may have encouraged traders to reconsider the odds of action next month.

GfK Consumer Confidence survey

Consumer confidence was also down in October, at its lowest since February. Consumers are concerned with the future of the economy. The possibility of a cold winter coming while dealing with fuel and food shortages, Brexit and surging inflation, as well as interest rates affecting the cost of borrowing, not to mention Covid-19 cases rising, does not sound especially promising. The Petrol Retailers Association (PRA) has said that all-time highs seen in April 2012 of 142p per litre for petrol and 148p for diesel will be surpassed by the end of October. Average prices for petrol and diesel had reached 141.35p and 144.84p respectively on Tuesday, according to Experian Catalist UK.

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With Bank of England policymakers signalling that the central bank is moving towards an early interest rate hike, traders have been trying to figure out what this means for the pound. Economists and forex analysts have offered both positive and negative comments about the bank’s intention to raise interest rates, with other analysts turning neutral. 

Interest rate rise could hurt the pound

Markets are now expecting the BoE to raise interest rates in November, with further rates to follow by the end of 2022. However, the link between higher interest rates and a stronger currency has been broken, unfortunately, due to the current energy crisis, higher costs and a struggling economy due to the pandemic. Within this environment, many analysts are concerned that an early rate hike will actually create more problems and that it could be reversed within two years, creating further uncertainty for the currency.  

Jane Foley, head of foreign-exchange strategy at Rabobank, said that “There is a lot of uncertainty,” in London. “It’s easy to argue that rates going up will strengthen the pound. But the risk of a policy mistake means the BOE could hike soon but then won’t be able to follow through” with more tightening.

Bank of England Policy Mistake?

Markets are unsure about the outlook for the pound, with institutional fund managers limiting their trades against the pound and others betting for the pound to strengthen. For some analysts, the BoE tightening will provide some support for the currency but, for others, the lack of economic growth will eventually reverse any gains.

Additionally, further challenges remain. Brexit tensions between the UK and the European Union over Northern Ireland could escalate into a trade war, but Prime Minister Boris Johnson has offer assurances that solutions will be delivered within the week.  

Despite the Bank of England’s Governor Andrew Bailey’s reassuring comments that the Bank will do what it takes as inflationary pressures rise, traders are concerned about the pound outlook in the longer term.

Pound remains “insensitive” to UK rate expectations

While many foreign exchange analysts have voiced their concerns about the pound outlook if the Bank of England proceeds to an early set of interest rate rises, HSBC strategists believe the pound is “insensitive to the continued hawkish drift in UK rate expectations.” Even if inflation falls at the end of 2022 and there is no need to raise rates higher on a long-term basis, HSBC says there is more to the pound than an automatic fixation on the BoE.

Indeed, the pound is not driven solely by the desire of the Bank of England to raise or not rates. A they argue, the pound’s performance has been mainly determined by global forces. It rises against the euro and US dollar on positive investor sentiment and falls when global markets struggle. As investors recently digested global concerns about the pandemic and the energy crisis, buying interest for the pound has returned, pushing Sterling higher.

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The pound remains strong and is close to last week’s gains against both the euro and the US dollar following Bank of England Governor Andrew Bailey’s comment that the bank is intent on raising interest rates as inflation risks rise.

Many analysts have noted the benefits of an early rate hike, while others have warned about the impact of an early rate hike on UK growth prospects. According to foreign exchange analysts, the pound has found support from expectations that the Bank of England will be among the first major central banks to raise interest rates since the pandemic started.

Bank of England

Bank of England Governor Andrew Bailey said on Sunday the Bank of England intends to raise interest rates if inflation continues to grow. Speaking to the Group of 30, an international body of financial leaders, Bailey explained that UK inflation will be temporary, but rising energy prices will push it higher and for a longer period of time. Bailey said: "Monetary policy cannot solve supply-side problems - but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations.” He also clearly stated: "We at the Bank of England have signalled, and this is another such signal, that we will have to act. But of course that action comes in our monetary policy meetings."

Some analysts believe that the shift in monetary policy will outweigh the negative effects of slow economic growth and will slowly push the pound higher.

Rabobank: Risks Ahead

The prospect of the pound rising next year and beyond could be hindered by fears around the medium-term outlook for the UK economy. Rabobank said: “Tensions with French fishermen and disagreements about the Northern Ireland protocol have brought warnings of a trade war between the UK and the EU. Neither had had a significant impact on the pound to date. That said, this is a risk that the differences between the UK and the EU won’t be resolved easily and, on the margin, this news-flow provides an additional disincentive to GBP investors.” They added: “We are not expecting the BoE to raise rates in the coming months and see scope for GBP to edge lower on disappointment.”

Next Interest Rate Rise

Money markets are now expecting a rate rise in November, and as many as three rate hikes in 2022. If the Bank disappoints and does not proceed to a rate rise, the pound will fall. At the same time, other analysts have talked of a Bank of England policy mistake as they believe raising interest rates would slow down growth. A more aggressive BoE tightening will push borrowing costs for households and businesses higher and will impact the UK housing market. Stagflation (no growth and high inflation) fears will add to concerns about the pound.

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Improved market sentiment has helped push the pound higher against the euro and the US dollar. Comments from two of the Bank of England's Monetary Policy Committee (MPC) members Silvana Tenreyro and Catherine Mann, who spoke out against an early rate rise, did not affect the pound.

Pound Rises

The British pound rose despite comments from the Monetary Policy Committee (MPC) member Silvana Tenreyo, who said the current rise in UK inflation is temporary and that it was early to raise interest rates.

In other news, the European Union threatened to retaliate if the UK abandons the Northern Ireland deal. Nevertheless, Sterling rose on improved risk sentiment.

Bank of England

Two of the Bank of England’s monetary policy committee members have said they prefer to wait and see how gas prices and shortages of raw materials will influence inflation before voting for an interest rate hike. Both economists highlighted that economic recovery remained uncertain.

  • Catherine Mann

Catherine Mann, who is a former chief economist at the Organisation for Economic Co-operation and Development and the US bank Citi, said that it was best to wait and see as traders are currently betting on tighter monetary policy in the UK and US. Mann said that market participants were doing the bank’s job because by speculating on what the bank will do have driven the cost of borrowing in financial markets higher, which, as Mann explained, is what a rate rise would do. She noted: “They see that monetary policy normalisation is the direction of travel … and so they are doing their homework and they are starting to price in that direction of travel.”

  • Silvana Tenreyro

Silvana Tenreyro was also against an early rate hike.  Speaking to BusinessLive Wales, she said even a rate rise could be “self-defeating” if inflationary pressures prove to be temporary. Tenreyro said that the current level of inflation was considered against last year’s low prices. Additionally, the surge in the global price of energy and other commodities pushed inflation higher but these are usually temporary. Tenreyro explained: “The prices go up, but they don’t keep going up sustainably, so you have a one-off price effect and in that sense inflation should be transitory. She also said: “By the time interest rates were having a major effect on inflation, the effects of energy prices would already be dropping out of the inflation calculation. If some effects were to prove more persistent, it would be important to balance the risks from a period of above target inflation with the cost of weaker demand.”

Many investors are speculating that the BoE will raise interest rates before the end of the year, becoming the first major central bank to raise rates since the start of the coronavirus pandemic.

 

 

 

Foreign exchange investors are interested to see how central banks will choose to act and when they plan to raise interest rates.

The Pound's rally higher despite dovish comments by Tenreyro, suggest that her views are already known and unsurprising and are not powerful enough to deter the majority of the Bank’s members raising interest rates. Some analysts expect an early rise to boost the pound, while others are arguing that a rate rise might be bad for the pound as it might raise costs at a time that growth is slowing down.

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