March 17, 2017 / 10:29 AM / 9 months ago

Sterling gains for third day on BoE lifeline

* Graphic: sterling and gilt yields

* Graphic: World FX rates in 2017

* Graphic: Trade-weighted sterling since Brexit vote

By Patrick Graham

LONDON, March 17 (Reuters) - The pound rose for the third day running against the dollar on Friday for the first time since mid-January, drawing confidence from signs some at the Bank of England may be leaning toward a rise in interest rates to support the currency.

Minutes from the Bank’s latest Monetary Policy Committee meeting shocked markets on Thursday by showing one outgoing official voting for a rise in rates and others on the verge of doing so if inflation gets much higher.

That seemed incongruous after a month where the hard numbers have finally begun to point to a weakening of economic growth as consumers face the effect of a 20 percent fall in the pound, a weaker housing market and uncertainty over jobs and investment as the government gets ready to launch Brexit talks.

Analysts said the turn away from the support the bank gave the economy with a cut in rates last August was probably chiefly due to the need to avoid another sharp fall in the pound.

“To me this was the sound of them (the BoE) prioritising concerns about inflation and inflation expectations over any impact on demand,” said Hamish Pepper, a currency strategist with Barclays in London.

“They know the currency has fallen a lot and they know that is going to add to imported price pressure. The worry is whether that is starting to have an impact on inflation expectations. I think they are quite happy to have the market price in some chance of a rate rise over the next year or two.”

Short sterling futures for next March have shifted by six basis points since the bank’s statement on Wednesday and now price in a single rise in interest rates over the next 12 months.

That should offer the pound some support as it heads into a period of renewed political pressure when Brexit talks start next month.

A number of major banks have forecast sterling will fall below $1.20 in the months ahead, but helped by the BoE, it has this week ridden out political noise around a new Scottish independence referendum and the risks of a poor Brexit deal.

It traded 0.3 percent higher on Friday at $1.2395 and 86.89 pence per euro respectively.

“Our belief that the BoE’s policy stance will shift later in the year looks to have become a reality a little earlier than we expected,” said Derek Halpenny, European head of global market research with MUFG in London.

“We certainly didn’t expect much in the way of a shift from yesterday’s meeting but that is exactly what we got. We expect the pound to benefit further.” (Editing by Julia Glover)

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