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Sterling has recently had something to cheer about after the Bank of England (BoE) Governor, Mark Carney, last month (September 2017) gave his strongest hint in a long time that UK interest rates may start to rise at the next meeting on 12th November 2017. Chances of a rise in borrowing costs have now risen to around 50% in November with a hike fully ‘priced in’ for February 2018. This is in contrast to the Monetary Policy Committee’s (MPC) 7-2 vote to keep rates on hold only last month (Sept 2017).
Sterling rallied to 1.14 versus the Euro and 1.36 versus the US Dollar after Carney’s comments, where he said “?if the economy continues on the track that it has been on – and all the indications are that it is – in the relatively near term you can expect that interest rates will increase.” However, making sure he kept expectations in check, he went on to say, “We are talking about just easing a bit off the accelerator to keep with the speed limit of the economy. So interest rate increases when they come – when and if they come – will be to a limited extent and in a gradual way.”
UK interest rates have now been at record lows of 0.25% since the 2016 Brexit vote, and prior to that 0.5% since the height of the economic crisis in March 2009.
Some sceptics point to the fact that the BoE have in recent years signalled a rise in interest rates only to backtrack and remain firm at record lows. It is fair to say that the economic and political landscape has been, and is, volatile to say the least. They can be excused for altering their outlook on a quarter-by-quarter basis. However, rising inflation, a growing UK economy and unemployment levels lowest since 1975 may now allow the Bank to finally pull the trigger and increase borrowing costs for households and businesses across the UK.
That being said, the enticement of Sterling for traders and investors has dampened in the last couple of weeks due to political uncertainty around Theresa May’s leadership position. Reports of a Tory coup to oust their leader came to a head on Friday 6th October when it seemed those members part of the plot back-doubled on the ring-leader, Grant Shapps (former Conservative Chairman). This whole chapter further tarnishes the Conservatives image which has been dragged through the quagmire since the UK general election earlier in 2017. Whilst Brexit negotiations are ongoing, this episode is only injecting more fear and uncertainty in to the situation and implies the Tories are not in a workable position to manoeuvre the most attractive Brexit deal for the UK. Many feel the next viable option, a Jeremy Corbyn led Labour government, is no more appealing. UK politics is in a state of limbo it seems at the moment.
As Carney indicated in his comments, if rates do indeed increase in November 2017 they are only expected to be by a very gradual amount ? maybe only to reverse the emergency cut immediately after the Brexit referendum. But indications are pointing towards further rate rises in 2018. But what does this mean for households up and down the country?
In their last meeting (September 2017), the MPC indicated one of the main reasons for not increasing rates was due to the potential outcomes and repercussions surrounding Brexit. Questions have been asked as to what is different only a month later, and in to November, for the BoE to now think rates should increase. Details of Brexit negotiations are drip feeding from Brussels ? none of which seem to be overly encouraging ? but there hasn’t been any significant updates on that front since September.
As mentioned earlier, it is true the economy is showing signs of improvement but it is far from the safety zone with GDP more than half of its counterparts in Europe and the US. Fears are that with interest rates above 0.5% the economy may struggle and inadvertently lay obstacles in place that the BoE will find hard to overcome. It’s no secret that wage inflation is lagging behind the headline figure and raising interest rates by too much too quickly may drastically affect many consumers who are already struggling.
There are over £1.3trln worth of mortgages in the UK of which a large amount are on variable rate options. Many of these mortgage holders would have never previously experienced an increase in borrowing cost. How those individuals handle that extra cost might be interesting.
For Sterling, November 12th is an important day to gauge the BoE?s latest thoughts and potentially know more about their plans heading in to 2018. Whether there is a rate increase or not, you can expect some degree of volatility in the price of Sterling against other major currencies.
Such adverse fluctuations in Sterling can be impactful on the profit margin of a business who may regularly deal with suppliers and clients overseas. There are strategies and tools to reduce this risk and it?s always worth exploring these avenues with a reputable foreign exchange provider who should be able to minimise risk to currency market movements in the most economical way possible for every business.
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