Pound Rises on Bullish Comments from Bank's McCafferty

- GBP boosted by bullish comments from BOE hawk

- Labour market out of slack and wages expected to rise 

- Global backdrop also supportive of higher interest rates

ian mccafferty bank of england

© Bank of England

Sterling continues its rally to range highs versus the Euro and the Dollar after encouraging statements from a leading Bank of England economist and member of the Bank's Monetary Policy Committee (MPC).

Ian McCafferty has urged his colleagues on the MPC to hurry up and start raising interest rates, in an interview with Reuters on Tuesday, April 10 saying fellow members of the rate-setting committee of the Bank should "stop dallying" over raising interest rates.

His comments led to a modest boost in the Pound which was trading up a quarter of a percent to 1.4155 versus the Dollar and 0.17% against the Euro at 1.1489 GBP/EUR, or up 11 basis points higher quoted from the European perspective of 0.8708 EUR/GBP.

"Sterling is up again and remains bid," says Neil Jones an analyst at Mizuho Bank citing "comments from Mccafferty that the BOE mustn't 'dally' any further over raising interest rates. That, along with an improved global backdrop as well as seasonal demand are supporting the Pound."

However, McCafferty's comments came as no great surprise to central bank watchers as he was one of two dissenters who voted to increase interest rates at the March 2018 meeting.

He steered clear of giving any numerical guidance on UK interest rates, arguing this would be too open to misinterpretation and error.

The official thinks most of the spare labour market capacity has been soaked up by the economy and as a result wages will rise faster than expected, which he expects the BOE's official wage growth forecasts to reflect.

He said the country had the lowest unemployment rate since 1975 and that employers were complaining of skills shortages and resorting to offering higher wages to attract the right sort of talent.

The inference is that this will eventually push up inflation and lead the Bank of England to raise interest rates and higher interest rates tend to make for a stronger Pound. Higher interest rates increase inflows of foreign capital from investors seeking higher returns, and this drives up demand for Sterling which appreciates as a result.

On the effect of imported inflation - due to the weakening of the Pound following the EU referendum - McCafferty was less optimistic than official Bank of England forecasts which see prices fading rapidly, arguing instead that it may stay higher for longer than his colleagues predict.

In the interview, he said Brexit uncertainty would be a permanent feature of UK economic landscape, and that it was hampering longer-term investment, but not shorter-term projects or exports.

McCafferty said he could not be sure whether to vote for an interest rate rise at May's policy meeting, but that there had been no data or Brexit developments to make him think he was wrong to vote to raise interest rates to 0.75 percent in March.

In reality he is highly expected to vote for a rise in interest rates in May, however, given the general consensus and market gauges appear to back a majority vote for a hike in May.

The approval of a two-year transition deal with the EU removes a major factor of uncertainty from the complex matrix of factors impacting on Sterling, thus making a rise in the currency more probable than before.

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