Bank of England edges closer to interest rate increase
The Bank of England left interest rates on hold at 0.25% following the latest policy meeting which was in line with consensus forecasts. There was, however, a surprise with the vote split on the Monetary Policy Committee (MPC). Five of the committee members voted for interest rates to be left on hold, but three members voted for an increase in interest rates.
Forbes had voted for a rate hike at the previous two meetings and was joined this time around by McCafferty and Saunders. The MPC is concerned that inflation will be higher than expected and above the 2.0% target throughout the 3-year forecast period. The Bank of England mandate is to target 2% inflation and they have to treat an over-shoot seriously.
There are, however, expectations that the economy will weaken and growth in ages has been subdued. The three members decided that the inflation risks had risen far enough to justify an increase in interest rates. If inflation continues to rise there is the potential for an increase in interest rates at the August meeting, and perhaps a recovery of the pound after its slump after elections.
Sterling strengthened with EUR/GBP declining to 0.8735 from 0.8800. Sterling is still being buffeted by political uncertainty as the government looks to finalise a deal with the Northern Irish Democratic Unionist Party (DUP) and economic policy is also unstable. There are, therefore, likely to be very volatile moves in Sterling over the next few weeks at least.
Overall, given the increased threat of a rate hike, investors needing to sell Sterling should wait for more attractive levels. Sterling is probably going to be one of the volatile currencies like it was in 2016.
Related: The Fed has just increased interest rates over in the U.S by 0.25%.
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