Sterling has risen on the back of expectations the Bank of England will raise interest rates. This expectation has increased significantly in the last week as investors believe the UK will be forced into raising the base rate as higher Inflation forces the Monetary Policy Committee’s hand. I personally believe such expectations have been over exaggerated and that in fact the Pound will quickly fall back down once there is a greater realisation of this situation.
In the last ten years since the Bank has been presiding over these historic lows there has been numerous periods where it was believed interest rates would rise in the future. All have proved fruitless and in fact the last move was a cut rather than a hike!
Mark Carney, Governor of the Bank of England admitted yesterday that whilst there was a growing case for a rise as a result of the higher inflation, lower growth in the future could make raising rates a problem. Such uncertainty at the heart of the Monetary Policy Committee (MPC) is indicative of the kind of struggle and challenge ahead for them to actually go ahead and make the call to raise.
The MPC consists of 9 members and a majority vote is required to see the interest rate rise. There appears to be a growing belief that November is now the time the Bank will raise the rate, personally I would expect that there will be some form of spanner in the works that causes the MPC to revise such expectations.
Inflation may well fall naturally of its own accord as Sterling has risen back on these comments, which will remove the main reason for many MPC member’s views. It is not that I think we won’t see any UK interest rates hikes longer term, I just think that current conditions will be deemed as slightly too risky for the MPC to proceed. Low growth and a lack of confidence following the Brexit vote are all weighing on the UK and the Pound. So, if you are buying a foreign currency with sterling and are relying on rates rising as a result of an interest rate hike you could be in for some surprises along the way.