Pound Solid as BoE Rate-Setters Eye Interest Rate Hikes

Bank of England MPC Treasury Select

The British pound (GBP) continues to trade around recent best levels after the Bank of England warned future interest rate rises are still on the cards.

With currency markets obsessed with the direction in global interest rates all eyes were on the Bank of England’s leading decision makers to ascertain when the first rate hikes in the United Kingdom would be delivered.

Governor Carney told law makers in an appearance before the Treasury Select Committee that low UK inflation would be temporary and that the BoE will aim to get inflation back to 2% in a “reasonable” horizon.

“We need moderate interest rate rises to ensure inflation rises back to target,” testified BoE member Dr. Ben Broadbent.

Martin Weale said UK rates might rise sooner than markets think.

However, the lack of a clear date for future hikes saw GBP largely unmoved:

The pound to euro exchange rate has dropped back to 1.3618. This is a wholesale quote; banks are seen offering rates in the region of 1.3084 for international payments. Independent providers are offering tighter spreads at 1.3523.

The pound to dollar exchange rate (GBP/USD) is at 1.5434. Data on spreads shows your bank is likely to be quoting in the region of 1.4829 while the best exchange rate being quoted by independents are seen at around 1.5326.

The gentle pattern to GBP trade through the appearance confirms that the committee failed to deliver any decisive indicator as to when rates will rise.

One clear positive for sterling came with the indication that no more quantitative easing is likely.

With the European Central Bank (ECB) announcing a massive quantitative easing programme, and inflation falling, law makers were keen to establish whether the Bank of England be tempted to pump more cash into the UK economy.

No discussions have been had with the Treasury regarding further stimulus confirms Carney.

He does however say it is entirely possible that further quantitative easing could happen but it is stressed that this is a hypothetical possibility – the Committee is not actively discussing further quantitative easing.

Forbes, the Next Hawk?

MPC member Kristin Forbes grabbed headlines ahead of the appearance of her colleagues before parliament.

Forbes, in a speech, warned on the potential risks to the economy if interest rates remained at emergency levels for too long.

She warned that that loose monetary policy, "may eventually foster financial sector vulnerabilities and asset bubbles" as well as potentially stoking inflationary pressures or stimulating unhealthy levels of household debt.

Forbes said:

“All of these trends merit close attention - as they could directly impact the MPC's primary mandate (inflation) or its secondary mandates (economic and financial stability). Any could factor into a case to tighten monetary policy in the near future.

“But they do not currently appear to be generating a sufficient cost to merit a change in interest rates today.”

This is a clear sign that Forbes will likely be the first to join Martin Weale and Ian McCafferty in voting for interest rate hikes.

Currencies typically rise in response to, or in anticipation of, higher interest rates as investors are attracted by a greater yield on their investments.