Sterling ticks up as investors poised for BoE interest rate hike

LONDON: The pound was up slightly against the dollar but held steady versus the euro on Thursday as investors bet on further interest rate hikes by the Bank of England to tackle stubbornly high inflation which is plaguing the British economy.

At 0910 GMT, sterling was up 0.13% versus the dollar at $1.2785, and 0.01% softer against the euro at 86.04 pence.

As all eyes turn to the BoE policy decision at 1100 GMT, investors are anticipating that the central bank will need to raise borrowing costs much further than initially anticipated to tame inflation.

Sterling seesaws as inflation data keeps heat on BoE

“Consensus is that it will be a hawkish 25 basis-point rate hike, with clear signals that the Bank of England will continue to tighten policy ahead,” said Francesco Pesole, foreign exchange strategist at ING.

Markets now see the chance of a 25 basis point rise at 52% and a 50 bps hike at 48%.

Pesole said there were 150 bps of monetary policy tightening by the BoE being priced in, so the room for sterling to benefit from hawkish rhetoric on Thursday was limited, while the room for it to soften from a dovish surprise was considerable.

“Sterling is still in somewhat vulnerable position, despite the fact that we think that the Bank of England will try not to push back against rate expectations for the time being,” Pesole said.

Wednesday’s data, which showed the rate of inflation remained unchanged from the previous month at 8.7%, saw the pound retreat against the dollar and euro as money managers expected the task faced by the BoE to be more substantial than initially envisioned.

The BoE’s conundrum is how to tame inflation without taking the British economy down alongside it.

Finance minister Jeremy Hunt said the government would “stick to its guns” and “won’t be pushed off course” on fighting inflation, highlighting the political support the central bank has to pursue a tighter monetary policy despite the consequences to the real economy.

One issue that has drawn attention from the wider public and politicians is the growing mortgage costs faced by households, with Hunt due to meet representatives of banks on Friday to ensure home loan lenders live up to their commitments to help borrowers.

The latest figures on Wednesday also showed that British house prices slowed year-on-year in April compared to March, with London seeing the lowest annual growth in prices.