Sterling gains as market prices in BOE shift on rates

Sterling gained by almost half a percent against the dollar on Friday, helped by a shift in expectations for interest rates that has some in the market backing the Bank of England ( BOE) to raise borrowing costs within months.

Analysts from Japanese bank Nomura were the first major house on Thursday to flip a call for a rise in rates this year.

Policy hawk, Kristin Forbes, in her last speech before leaving the bank, urged colleagues on Thursday evening to raise rates immediately to quell the inflation pressure stemming from a weaker pound.

Sterling racked up a solid 0.4 percent gain against the dollar on Friday, to trade at $ 1.2732. It was flat at 87.95 pence per euro.

“We think rates will be on hold for the next year – but the market has definitely started pricing in the chance of a hike in the next six months,” said Rabobank strategist Piotr Matys. “That is clearly giving sterling some support.”

Short- term UK market interest rates have shifted since a speech by the Bank’s chief economist, Andy Haldane, earlier last week, with short sterling pricing foreseeing a strong chance of a rise in rates by December.

Economists from Barclays said that, while they stuck with their call for rates to stay on hold, there was a risk the Bank would hike in November and start to prepare markets for that move in August.

US bank JP Morgan also warned that the risks of a rise this year had increased, given a series of higher- thanexpected inflation numbers, which was mostly put down to the weakness of the pound.

Governor Mark Carney, however, said earlier last week that it was too early to move, and any rise in rates would put aside signs that the UK economy – and household demand – is currently ill- equipped to swallow higher borrowing costs.

The pound continues to suffer because of political uncertainties generated by Brexit talks and a snap election this month which left British Prime Minister Theresa May short of a Conservative majority in parliament.