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

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9 February 2018

thomasdodds

The Pound jumped by over half a percent against both the US Dollar and the Euro following the Bank of England’s ‘Super Thursday’ announcement yesterday afternoon, in which the BoE ramped up expectations for a sooner-than-expected interest rate hike in the UK.

I
n what could be seen as a somewhat dovish tilt, the nine member strong committee voted unanimously to keep rates unchanged today, defying some expectations that one of the more hawkish members could vote for an immediate hike. The MPC did, however, strike an optimistic tone over the outlook for the UK economy, raising its growth forecasts in the light of a strong global recovery. Britain’s economy is now expected to grow by 1.7% in 2018, up on the previous 1.5% estimate. Policymakers also surprised the market by shortened the horizon by which it targets inflation returning back to its 2% target. The rate-setting committee said that it now wanted inflation to return to target over a ‘more conventional horizon’ of two years, rather than three.

With the BoE both raising growth forecasts and targeting a shorter horizon for inflation to return to target, the bank is clearly committed to raising rates more aggressively over the coming years than it had anticipated last November. It claimed ‘were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period’.

Given this undoubted hawkishness, we are bringing forward our expectations for the next interest rate hike in the UK from August to May, when the next set of economic projections will be released. This is currently a slightly faster pace than the market is pricing in and therefore should support our forecasts for a gradual appreciation of Sterling against most of its peers in 2018, particularly against the Euro.

Stock market slump continues, Euro set for worst week since October

Away from the Pound, financial markets were once again rocked by another sharp decrease in global stock markets. The Dow Jones fell by over 4% for the second time this week as the hawkish Bank of England reignited concerns about higher interest rates globally. Increasing interest rates are typically bad news for stock prices, given businesses incur higher interest rate changes during periods of rising rates. However, FX markets were calm, barring another modest apperception in the Yen. The Euro edged higher on the increased appetite for safer currencies, albeit it still remains on course for its worst weekly performance since October.

Today could be a quieter day in the currency markets with no major data releases. Volatility in the stock markets may continue to be the major driver.