The pound has hit heights against the dollar not seen since the Brexit vote result was announced, after a Bank of England policymaker added his voice to support for an interest rate rise.
Gertjan Vlieghe said he supported the view, expressed by a majority of the nine-member monetary policy committee (MPC) at Thursday’s meeting, that rates could rise in the “coming months” to help keep a lid on inflation.
In a speech to a conference in London, the economist said: “There remains a risk that, at some stage, the uncertainty surrounding the Brexit process has a larger impact on the economy than we have seen so far.
“If that happens, monetary policy would respond appropriately.
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“But for now, it seems the net effect of the many underlying forces acting on the UK economy is that slack iscontinually being eroded and wage pressure is gently building.
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“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.”
It was revealed earlier this week that the annual rate of inflation had hit 2.9% in August, with pay growth running at 2.1%.
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Much of the increase in inflation can be explained the Brexit vote.
Sterling’s slump against a basket of international currencies following the EU referendum result produced, this year particularly, a steep rise in import costs being passed on to consumers.
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The pound has since recovered some poise – soaring to a high above $1.36 at one stage on Friday and building on gains made after Thursday’s MPC meeting.
It had crashed from $1.50 to $1.32 immediately after the Brexit result was known in June 2016 – before tumbling further to lows below $1.20 earlier this year.
Friday’s surge also saw the UK currency higher versus the euro, trading above €1.12 only weeks after talk grew of looming parity between the two.
Sterling’s strengthening was reflected on the FTSE 100 as big multi-national earners bled market value. The index was down around 1% for a second consecutive day and closed the session at 7215.
Market participants saw the currency strengthening as a realisation that a rate hike was now likely, given that inflation is tipped to hit 3% before next year.
Neil Wilson, senior market analyst at ETX Capital, said: “This does not mean the start of a tightening cycle as we understand them necessarily, but at least a ‘correction’ to the Bank’s cut last August.
“Indeed with sterling now back to more sensible levels it will no doubt raise debate again about whether the Bank should have cut rates given that the collapse in sterling is what’s driving inflation.”
Source: Sky