Sterling high 'suggests rate hike'

Updated: 

PA

Sterling climbed to a near six-year high against the US dollar today as it looked increasingly likely that the UK would take the lead on raising interest rates.

The pound rose by a cent as it pushed above the 1.70 mark before surpassing a previous high from August 2009 and reaching new levels not seen since October 2008.

It came after remarks from US Federal Reserve chair Janet Yellen made clear that it saw no need to raise rates in America any time soon.

In contrast, the Bank of England's Monetary Policy Committee (MPC) has warned that markets have been under-estimating the likelihood of a rate hike this year, echoing comments by governor Mark Carney that this could come sooner than expected.

Sterling also advanced a little against the euro and is trading at highs not seen since November 2012.

The strength of the pound will cheer British holidaymakers this summer as it gives them greater spending power abroad.

But it creates a potential hurdle for the drive to increase exports as foreign customers will find made-in-Britain products more expensive.

Simon Smith, head of research at FxPro, said: "We've seen a huge reversal in the past six months, with the UK now expected to put rates up before the US, in sharp contrast to the prevailing view at the turn of the year."

He said this had been reflected in a sharp rally in sterling so far this year but added that this "could still have some way to run".

The pound has seen brief spikes in recent days on remarks by Mr Carney and the minutes of the MPC's latest meeting but the latest comments by Ms Yellen mean it is now holding firm above the 1.70 level against the dollar.

She indicated that despite a steadily improving job market and signs of creeping inflation, the Fed sees no need to raise US rates any time soon. Most economists think this is at least a year away.

However in Britain, analysts are bringing forward their expectations for a rate rise as early as this year.

Central bankers around the world have held the cost of borrowing at historic lows in recent years to try to nurse moribund major Western economies back to health.

The US and the UK have also been creating further stimulus in the form of asset purchases known as quantitative easing (QE) - effectively money-printing.

Forward guidance from the Bank of England last year pegging this loose monetary policy to the unemployment rate initially suggested that there was no chance of a rate rise before 2016 at the earliest.

It contrasted with the picture in the US, where the Fed began "tapering" its stimulus by curbing the amount of money it pours into QE every year.

But while this process is continuing, a rate cut in America still looks a distant prospect - as the scenario in the UK has changed rapidly.

A much-sharper-than-expected fall in unemployment means it is now already below the Bank of England's 7% threshold for thinking about a rate hike, causing policy-makers to dump forward guidance and bringing the prospect of a rise nearer.

It is a stark contrast with the picture in the eurozone, where central bankers are still cutting the cost of borrowing amid an ongoing slump - last month lowering the rate from 0.25% to 0.15%.

The comparative nearness of a rate hike in the UK adds up to a strengthening of its position against the euro and the dollar.

Official figures showing a fall in retail sales during May failed to dent sterling, especially as the data also indicated a trend of sustained growth that was the strongest since before the recession.

The pound will also have been buoyed by CBI manufacturing figures showing a pick-up in order books including better demand for exports.

However CBI deputy director-general Katja Hall warned: "The recent rise in sterling could impact on the resilient export orders we've seen lately."

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