Rate hike alert lifts Pound to a 12-month high

STERLING hit its highest level for more than a year against the dollar last night as the Bank of England set the scene for an interest rate rise before Christmas.

The pound climbed above $1.34 against the greenback for the first time since early September 2016 and reached a two-month high of close to €1.13 against the euro.

The surge in the value of the British currency, under pressure since the Brexit vote last year, came after the Bank said an interest rate rise ‘is likely to be appropriate in the coming months’ if the economy stays on track.

Although the Bank froze rates at 0.25pc yesterday, Governor Mark Carney said the possibility of a hike had ‘definitely increased’.

There was also a swift reaction on the bond markets where gilt yields – a key measure of Government borrowing costs and which also tend to set pension annuity rates – rose sharply as investors bet that rates could rise as soon as November.

The ten-year gilt yield rose above 1.23pc for the first time in six weeks. But shares were on the slide with the FTSE 100 giving up early gains to close down 1.1pc, or 84.31 points, at 7295.39, on fears the Bank was just weeks away from withdrawing some support from the economy.

George Buckley, an economist at banking group Nomura International, said the Bank’s comments should be seen as ‘clear preparation of ground for an imminent interest rate rise’ to 0.5pc.

He said the move, which would reverse the cut to 0.25pc in August last year after the Brexit vote, could come in just seven weeks on November 2, after the next meeting of the Bank’s rate- setting monetary policy committee.

Michael Hewson, chief market analyst at City trading firm CMC Markets UK, claimed that investors betting against sterling have been ‘mauled by the Bank of England’.

He said: ‘Currency markets appear to have been caught a little short after the Bank of England struck an unexpectedly hawkish tone on the potential for a possible move in interest rates.

‘The pound has hit a one-year high against the US dollar and jumped sharply against the euro, with the potential that we could see us head towards $1.35 in the coming days.’

The prospect of higher interest rates typically boosts a currency because investors are attracted by the promise of higher returns.

The pound has been making steady gains against the dollar in recent weeks amid pressure on the greenback from investors worried about the outlook for the US economy under Donald Trump.

Early enthusiasm for the Trump administration, fuelled by the promise of tax cuts, deregulation and increased infrastructure spending, has given way to concerns about free trade and political deadlock in Washington.

The pound has now gained around 11pc against the dollar since it hit the lows of $1.20 earlier this year.

But it remains down 10pc against the dollar and 14pc against the euro since the Brexit vote.