Sterling soars as Bank of England signals faster pace of rate hikes

Alicia Cross
February 10, 2018

The Bank of England have announced earlier today that they may be gearing up to increase interest rates in the United Kingdom if the economy continues to show signs of positive growth combined with increased inflation levels.

This gloomy outlook over price growth has therefore suggested that the RBA does not feel conditions in the economy will warrant a tightening of borrowing costs for some time yet, with the next rate hike potentially not arriving until 2019, assuming the current economic uptrend does not accelerate above forecasts. Swap rates, which mortgage lenders use to price their fixed-rate home loans, have already been rising with, for example, the two-year rate more than doubling during the last 18 months.

Its forecasts at the time indicated there could be two more increases of 0.25% over three years.

The rate had returned to 0.5 percent, a level it had previously held since early 2009.

Even though policymakers voted unanimously in favour of leaving interest rates on hold this month the odds of a May rate hike picked up substantially.

James Smith, an economist at ING, added: "We now expect the Bank of England to increase rates at the May meeting".

"The MPC has clearly taken a more hawkish stance", Dr Howard Archer, senior economic adviser with EY ITEM, a London-based financial analysis firm, told Xinhua on Thursday.

All in all, the message from the central bank proved positive, in spite of the persistent uncertainty of Brexit negotiations and its negative impact on domestic growth.

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Key to the BoE's rate-decision-making process is inflation, and Thursday also saw the release of the quarterly inflation report.

The UK benchmark index has fallen deep into the red in today's session, following a downbeat lead from the U.S., staying firmly in negative territory following the Bank of England's (BoE) rate decision and inflation report.

"As well as this crucial fact, the rest of the world is also doing way better than many people would have thought a year ago, so it makes it easier for the United Kingdom".

The world's sixth-biggest economy is lagging behind a strong global pick-up, due to a rise in inflation and fall in business confidence since the referendum.

Inflation reached a peak of 3,2 percent in November, falling to 3 percent in December, well above the 2 percent policy objective set by most developed economies. The difference between the highest and lowest prediction for the first and second quarter of 2018 is 0.7 percentage points.

However, the MPC said since then the outlook for the United Kingdom economy has slightly improved with a falling pound and low unemployment and it is therefore predicting 1.8% growth this year against its November forecast of 1.6%.

But the British economy was structurally reassessed in the report, and found wanting in productivity, which it is forecast will now provide an upper limit to growth.

The European commission is forced to upgrade its growth forecast for the United Kingdom economy to 1.5 per cent from just 1 per cent.

Other reports by Free-Prsite

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