Sterling steadies as investors wait for BoE rate hike clues

Posted September 14, 2017

But the Bank said that all policymakers believed "some withdrawal of monetary stimulus was likely to be appropriate over the coming months", possibly as soon as November.

"Furthermore, the case for an interest rate hike anytime soon now looks pretty flimsy overall to us although sterling's recent overall slippage may well be of some concern to the Bank".

The BoE's step toward tighter monetary policy comes as the Federal Reserve is gently increasing short-term interest rates in the U.S. and the European Central Bank ponders when to round off its multi-trillion euro asset purchase programme amid a buoyant eurozone economy.

And recall, the Bank has a knack for not delivering on the "imminent" rate rises it has promised in the past.

If Fed officials indicate that the inflation data was impressive and believe inflationary pressure will be strong enough to support tighter United States monetary policy, Fed rate hike bets will continue to rise and USD/GBP will weaken.

As well as surging against the dollar, the pound also jumped against the euro, rising by about one and half euro cents to 1.1269 euros. The US currency appeared to backtrack as some analysts said Hurricane Harvey may have skewed the CPI numbers at the end of August, while reports that North Korea may be preparing to launch another missile test also unsettled some traders.

"We doubt that the current high rate of inflation will panic the MPC [monetary policy committee] into an earlier rate hike. From today's release, it is clear the committee has run out of patience with market based rate expectations", Alan Wilson, fixed income portfolio manager at State Street.

She continued: "Anticipation of a rate hike may continue to provide the pound with opportunities to strengthen against the dollar, as could any renewed concerns over U.S. tax policies or the path of inflation in the US". Economic growth and low unemployment are clearly important, but neither can come at the expense of stable prices or an economy quickly unravels. The remaining seven members of the nine person committee voted to leave them unchanged.

Sterling fell on Wednesday after posting its biggest daily gain in more than two months the previous day as investors took profits before a central bank meeting on Thursday that will have to grapple with divergent data in recent days.

Markets hope that the surge in inflation will push the BoE towards tightening its monetary policy and raising interest rates from an all-time low, in order to ensure that inflation remains under control and does not constrain consumer spending too much.

Inflation is running at 2.9% - nearly an entire percentage point above the bank's mandated target, with an interest rate hike a possibility as a means to help bring down inflation closer to the 2% target.

Further, spare capacity in the economy is being absorbed a little more rapidly than expected in August.

SEB Research: With one of the hawks now replaced the support for rate hikes in the MPC has decreased.