LONDON: Sterling rose to a seven-year high against the euro on Tuesday, after a Bank of England policymaker said British interest rates could rise in the near future should inflationary pressures pick up quickly.
Kristin Forbes said in a speech that the risks from a return of inflation, asset price bubbles in the financial sector and levels of consumption and savings were “moderate and manageable” at the moment. But these merited “close attention.”
Her comments came less than an hour before BoE Governor Mark Carney along with some of his colleagues will testify to parliament’s Treasury Committee. Analysts and traders expect the central bankers to see through the recent drop in inflation and highlight the steady economic growth.
Sterling rose to 73.17 pence per euro, up 0.2 percent on the day. It was trading at 73.28 pence before Forbes’ comments. It was flat against the dollar at $ 1.5452, but the gains against the euro pushed sterling trade-weighted index to 91, its highest in over six years.
Marshall Gittler, head of global FX strategy at IronFX Global, pointed to Carney’s comments nearly two weeks ago that “the most likely next move in monetary policy is an increase in interest rates”.
“If they maintain their tightening bias as seen in the Bank’s inflation report, this could be sterling-positive,” he added.
Carney’s comments and recent upbeat economic data have led to a steadying of rate hike expectations — after they were pushed back by more than a year. Investors are pricing in the chance of the first rate hike by the BoE in early 2016.
With almost all major banks forecasting more losses for the euro as the European Central Bank embarks on quantitative easing, the pound looked likely follow the dollar higher this week if testimony by Federal Reserve chief Janet Yellen affirms expectations of a U.S. rate rise this year.
Petr Krpata, currency analyst at ING said that any clarification from the BoE on the timing of the first rate hike, could see euro/sterling drop to 73 pence.