Bank of England signals steeper interest rate rises to reign in inflation

EUR  USD chart

The rise directly affects 8.1 million households servicing a mortgage, although interest rates will remain at historically low levels.

Demand for the Pound picked up significantly on the back of the BoE's meeting minutes, which proved to be slightly more hawkish in nature than anticipated.

Given this undoubted hawkishness, we are bringing forward our expectations for the next interest rate hike in the United Kingdom from August to May, when the next set of economic projections will be released.

Confidence in the Canadian Dollar, meanwhile, was still hampered by the softness of the oil market and a general sense of investor risk aversion.

"The squeeze from that depreciation is coming off, the path from higher important prices is probably at its peak and we are starting to see wage growth improve".

Mr Carney refused to be drawn on the exact timing of future hikes, but said they would need to rise "somewhat earlier and by a somewhat greater degree" than expected in November.

In November 2017, the MPC hiked rates for the first time in over a decade, reversing the decision made in August 2016 to cut rates following the UK's vote to leave the EU. The minutes from the Bank of England's meeting has noted that the global economy is improving and that the United Kingdom is also improving, hanging on the coattails of global growth.

However, the MPC said since then the outlook for the United Kingdom economy has slightly improved with a falling pound and low unemployment and it is therefore predicting 1.8% growth this year against its November forecast of 1.6%.

"The flip side of interest rate rises for defined benefit scheme members is that, should they increase by more than expected, the record high transfer values that we have seen are likely to come to an end".

On Thursday, the Governor of the Bank of England, Marc Carney, signalled that an interest rate rise would be brought forward to respond to recent economic developments. The pound rose sharply on the news, gaining 1.1 percent to $1.4033 as investors factored in the prospect of higher rates. "What is fixed is our remit and rates change with the economy".

While the trade deficit for December is expected to have narrowed by around -£400 million, the latest GDP estimate from the National Institute of Economic and Social Research (NIESR) is predicted to have slowed from 0.6% to 0.5%.

Today could be a quieter day in the currency markets with no major data releases.

Loosening of the domestic labour market could well encourage the Bank of Canada (BOC) to sit on its hands for longer, rather than returning to a monetary tightening bias in the months ahead.

With the oil market still in a bearish mood as rising U.S. output erodes the impact of the OPEC-led production-limiting agreement the Canadian Dollar remains somewhat vulnerable.

"We are left with the impression than the BoE wants to squeeze in a hike before the summer, come what may", the economists said in a note to clients.



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