The Bank of England (BoE) surprised the markets today by suggesting that they may be ready to increase interest rates sooner than the markets currently expect.

The Monetary Policy Committee (MPC) voted 7-2 in favour of keeping interest rates on hold at today’s meeting, at an historic low of 0.25%, but owing to rising inflation a rate hike may be brought forward. Previously it was thought there may not be an rise in the interest rate until 2019.

This led to the Pound making huge gains versus the Euro and the US Dollar causing the Pound to hit its best level to buy US Dollars in over twelve months.

Bank of England Governor Mark Carney said:

“The majority of members of the MPC, myself included, see that the balancing act is beginning to shift… and in order to return inflation to that 2% target… there may need to be some adjustment of interest rates in the coming months.”

The impact of inflation

Inflation was measured at 2.9% this week which was the highest we have seen in 5 years and if inflation continues to rise this could mean the Bank of England have little choice but to raise interest rates.

With the UK celebrating the best unemployment levels in over 30 years as well as the UK Repeal Bill being approved by the entire Conservative party, this week the news has so far been very positive for the British economy and this has been reflected in Sterling exchange rates during this week.

If the UK economy continues to show positive signs then we could see the beginning of a long and sustained fightback for Sterling. However, be aware that although we have had a lot of good news this week there is still the topic of Brexit which will continue to dominate the headlines and the future of Sterling.