Published: Sat, February 10, 2018
Health Care | By Oscar Goodwin

Sterling surges as BoE flags earlier rate rise

Sterling surges as BoE flags earlier rate rise

Markets were steering clear of the Australian Dollar elsewhere as well, in part thanks to a fall in the fourth-quarter NAB business confidence index and a speech from Reserve Bank of Australia (RBA) Governor Philip Lowe, in which he repeated his claim that interest rates were going nowhere anytime soon.

Some economists have said that the Bank of England has a narrow window to raise rates because later in the year, London and Brussels could be wrangling over their long-term relationship, weighing on the economy and possibly preventing the bank from moving.

Rate futures showed investors now saw a almost 70 percent chance of a BoE rate hike in May BOEWATCH , up from under 50 percent before Thursday's announcement.

GBP  USD price chart
GBP USD price chart

In the Inflation Report, the bank said UK GDP growth was projected to remain around its current pace, a slightly stronger near-term outlook than in November, underpinned by strengthening global growth.

The Bank of England chose to stand pat on rates on "Super Thursday" as widely expected, but hinted at somewhat earlier- and deeper-than-expected rate hikes.

The bank's Monetary Policy Committee (MPC) members voted unanimously to keep rates on hold, but said they would need to rise "somewhat earlier and by a somewhat greater extent" than previously outlined to prevent the economy overheating.

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The Bank of England is sticking to its gradual interest rate plan, and before the Thursday meeting, the financial markets expected interest rates to reach 1.2% by the beginning of 2021.

He added: "We therefore remain underweight fixed income assets, and remain short duration".

"The Bank sees growth at 1.8% this year, with demand interestingly coming from outside the EU". If you haven't already, those with mortgages or planning to buy may want to consider fixing their repayments while rates are still low.

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Meanwhile, the views of the opposition Labour Party, which may be a determining factor should there be a parliamentary vote on any final Brexit deal, are also considered opaque.

Even a rise from 0.5% to 0.75% will feed through into higher mortgage rates. So the rate needs to go up.

He stressed however that rises would be limited and gradual, assuring borrowers the United Kingdom will not return to interest rate cycles "experienced in the past", when historically there were two rises a quarter and borrowing costs stood at 5 per cent on average. 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.

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The comment came on the back of a higher growth forecast, with the Bank expecting an average annual expansion of 1.75% over the next three years. If this is repeated for the February figures then the AUD could rise in value. Many schemes' funding positions will have suffered from the recent market volatility.

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