Sterling jumps after BoE sees rates rising sooner

Bank of England governor Mark Carney

Bank of England governor Mark Carney

Although British inflation has been running well above its 2 percent target, due in large part to the fall in sterling after the Brexit vote, the BoE has raised rates only once so far since the 2007-09 financial crisis - in November - while the U.S. Federal Reserve has raised them five times.

Carney and colleagues said they now wanted to return inflation to its 2 percent target over "a more conventional horizon", a sign they were turning their sights to tackling price growth over two years rather than three.

"Were the economy to evolve broadly in line with the February inflation report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report", the MPC said. The same day, the Reserve Bank of India kept its policy rate unchanged, to "carefully" nurture economic growth.

Bank of England Governor Mark Carney speaks during the central bank's quarterly inflation report press conference in the City of London, Britain, February 8, 2018.

On Thursday, the Governor of the Bank of England, Marc Carney, signalled that an interest rate rise would be brought forward to respond to recent economic developments.

"A rise would clearly have an effect on mortgage rates for new and existing borrowers and so it will be interesting to keep an eye on movement in swap rates".

As a result, future interest rates will have to be higher for any given rate of growth, holding back the economy. It now still expects average wage growth to pick up to 3 per cent this year, despite similar forecasts of an uptick frequently being proven wrong in the past.

"On the subject of Brexit, the Bank sounded a note of caution, saying it remained the key source of uncertainty".

However, the Bank itself stressed again that it sees concerns about Brexit weighing on firms' investment plans, suppressing overall growth relative to where it would otherwise be.

The Reserve Bank cited hardening US bond yields, fluctuating global crude oil prices and possible slippage of the government's fiscal consolidation targets as reasons for not changing lending rates.

Sterling jumped on the announcement, with expectations of more rate hikes bullish for the UK's currency.

There are host of other factors including rising commodity costs and higher disposable income by way of increase in salary for a huge number of government employees, leading to spike in inflation. All three of the PMIs - for the services, manufacturing, and construction sectors - have come in worse than expected at the start of the year, with the construction sector in a particularly troubling state. And Mr Carney recently estimated that the United Kingdom economy is around 1 per cent smaller than expected before the referendum vote and that this will rise to a relative loss of around 2 per cent by the end of 2018.

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