Pound Approaches Two-Week Highs as Bailey Denies Secret Plan for Rate Hikes
Market Movements and Central Bank Responses
By Amanda Cooper
LONDON, Sept 9 (Reuters) - The pound edged towards two-week highs against the dollar on Wednesday, shrugging off a rally in the oil price above $100 a barrel as the conflict in the Middle East widened.
With crude now 40% above where it was prior to the start of the war at the end of February, and European natural gas prices around three times higher, central banks are under pressure to raise interest rates.
Britain is especially reliant on energy imports. Consumer inflation picked up to a rate of 2.9% in July, from June's 15-month low of 2.6%.
Interest Rate Outlook and Market Expectations
Money markets show traders do not expect the Bank of England to raise interest rates when it meets next week, but at least two hikes are priced in by next March, with a 40% chance of a third by then. The Federal Reserve, by contrast, is only expected to raise rates twice by that point, according to the rates market.
The pound was last a touch stronger on the day at $1.3545, its highest since August 28. It has been one of the better-performing major currencies against the dollar this year, with a gain of 0.5%, compared with a 1% drop in the euro, or the 2% decline in the yen.
Drivers Behind Sterling's Performance
Much of sterling's tailwind has come from the expectation that the BoE will have to raise interest rates, especially with growth holding up.
BoE Governor Bailey's Comments
Economists and analysts are at odds with the market, as is BoE Governor Andrew Bailey, who on Tuesday pushed back against the idea of a rate hike being inevitable.
"What I want to dispel is the idea that we've really got a secret plan, we know where we're going to go to and it's unconditional," he said at a hearing before lawmakers in parliament.
Energy Prices and Rate Projections
There is good reason for the belief that higher energy prices could be a factor in the rate outlook, according to ING strategists, who say that, since the start of the Iran war, every $10 increase in Brent has added around 15 basis points to 2-year rates, compared with 11 bps for euro zone rates and 8 bps for U.S. ones.
The British rate outlook, as reflected by the market, appears to be overdone, ING strategist Michiel Tukker said, but the level of uncertainty around the oil price and the fiscal risks ahead, starting with the Autumn Budget next month, complicate the prospects for the pound itself.
"Only once the predictability of oil prices improves do we see scope for tactical opportunities. But with oil likely to test $100 again, we stay on the sidelines," he said.
(Reporting by Amanda Cooper; Editing by Alex Richardson)
