LONDON: Sterling steadied near a 20-month high versus the euro on Monday after Bank of England Governor Andrew Bailey sent a fresh signal that the central bank is gearing up to raise interest rates as inflation risks mount.
Sterling has gained 5.5% versus the euro this year, with analysts pointing to expectations the BoE will raise rates as a major factor supporting the pound, while the British economy has struggled with a shortage of labour, an energy crisis and rising COVID-19 cases.
During an online panel discussion on Sunday organised by the Group of 30 consultative group, Bailey said the BoE will "have to act" in its monetary policy meetings on the risk of medium term inflation.
He continued to believe that the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer.
On the expectations of rate hikes, 2-year British government bond yields jumped by 16 basis points to their highest level of 0.751% since May 2019.
Overnight, sterling surged again to its highest of 84.25 pence versus the euro since February 2020. By 1450 GMT, it lost some steam, trading 0.1% lower at 84.54 pence.
Versus a strengthening dollar, it edged 0.1% lower at $1.3726, but not far from a one-month high touched on Friday. The Bank of England seems to be using the weekends "to prime the markets for imminent rate hikes", Deutsche Bank investment strategist Jim Reid told clients. "Sterling has seen little change" as markets were already pricing in a rate action.
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