Pound Sterling rises 1% ahead of Bank of England rate rise
09 Feb 2018 By Liam Sheasby
It has been an unusual few months for Pound Sterling. The Bank of England, predicting 1.5% economic growth in 2018, announced an unexpected rate rise of 0.25% last November and pushed the UK’s interest rates back up to 0.5% - the level they were between 2009 until 2016. On the surface it wasn’t that big a move, but in reality the repercussions saw the Pound become one of the best performing global currencies.
With the global economy growing at a solid 4%, the Bank of England has since revised its UK economic growth figures to an estimated 1.7%, and BoE chief Mark Carney is suggesting that the planned interest rate rises for 2018 could be brought forward. The rate rise isn’t expected just yet, as the Bank and investors are waiting to see the latest UK wage growth figures. The expectation is that these figures will be an increase on the last ones, providing more economic boost courtesy of a greater capacity for the public to spend, and from that the Bank of England can implement a rate rise accordingly.
Economists are currently predicting the rise will come in May, though it’s uncertain how big it will be. Another 0.25% would be a safe bet, but it would be a bold statement of faith and intent from the Bank of England to raise interest rates by 0.5% to 1% overall. Despite the steady growth in the world economy, it’s unlikely to see interest rates reach anywhere near the levels they were in the early 2000s of around 3.5% to 6%.
The Pound is presently worth $1.40 and €1.14, which represents a 1% rise in value overnight. The boost to the currency followed Carney’s announcement and highlights the expected correlation between an interest rate rise and a stronger Pound.
Mark Carney, governor of the Bank of England and chairman of the G20 Financial Stability Board
A large part of the Pound’s success has come from profiting at the expense of other currencies in the past few months, namely the US Dollar and the uncertainty around the US Government’s financial policies. One minute they want a weak Dollar to boost exports, the next they want a strong Dollar for investment. Regardless of this, if the Federal Reserve increases the US interest rates – and it is expected to happen several times during 2018 – then it’s a sign that the US economy can handle higher rates which in turn restores faith in the Dollar and results in a growth of demand and value for USD. The change would bring the Pound down a peg or two and move the two values a lot closer together.
The other aspect boosting Pound Sterling was an improvement in Brexit talks. Optimism benefits the Pound, and in the last few weeks the news seemed better and talks were progressing nicely. Negative news is almost inevitable though, and Bloomberg, Reuters, and the Daily Express all recently reported the problematic Brexit negotiations – in particular the UK government’s in-fighting.
Dissent is rife, and many MPs are actively contradicting each other. Part of this is a plot to oust Prime Minister Theresa May, but the main problem is a genuine lack of consensus on what is wanted. Some ministers want open borders, some don’t. Some ministers want to remain in the customs union, some don’t. The official Downing Street line is that the UK will leave the customs union, but as Sky News reported just this morning, the EU is already publicly stating that it is losing patience and may remove the two-year transition period if the UK government doesn’t start making decisions and following them through.
The initial fear of Brexit resulted in the Pound dropping to $1.19 in value when the result was announced. There was a slight silver lining for British exporters that meant demand rose for UK products, but faith was shaken across the world. People didn’t know what was going to happen, and still don’t, and the best way forward in such situations is with caution.
At that time, the price of gold shot up by an incredible amount and became the go-to for investment. If a ‘cliff-edge Brexit’ happens come March 2019 then we can expect a similar scenario; faith in Pound Sterling will plummet and the demand for gold and silver will rise. For 2018 at least, we should expect a near-future drop in the Pound value and then a steady rise throughout the year, with the Pound gaining value at a pace that is comfortable for investors and businesses alike.