Bank of England dove echoes rate hike message

LONDON: The prospect of British interest rates rising for the first time in 10 years grew on Friday when a Bank of England policymaker who had been its strongest advocate of ultra-low borrowing costs said rates might need to rise in the coming months.

The comments by Gertjan Vlieghe largely echoed the BoE´s message a day earlier, when it surprised investors by suggesting it could raise rates as soon as at its next meeting, in November.

But coming from Vlieghe, they prompted investors to pile on bets on a rate hike, despite several false starts in recent years when the BoE has previously hinted at changes in policy only to be overtaken by changes in the economy.

Vlieghe was the first MPC member to vote for a rate cut after Britain´s shock referendum decision in June 2016 to leave the European Union.

In July this year, he said a premature hike would be a bigger mistake than one that was slightly late. After his speech on Friday, sterling hit its highest level against the U.S. dollar since the Brexit vote, peaking at $1.3616."It’s been quite an incredible week for the pound, with the currency soaring across the board," David Cheetham, chief market analyst at XTB online trading said.

"An increase at the next meeting in November is now odds-on according to the markets.

"Yields on two- and five-year British government bonds, which are sensitive to short-term speculation about rates, also hit their highest level since the Brexit vote. Ten-year gilt yields were set for their biggest one-week jump since June 2013, with a rise of 32 basis points.

Vlieghe said that until recently, he had favoured holding off on monetary policy changes, given Britain´s slow economic growth and the lack of inflation pressures other than the impact of the Brexit fall in the pound.

"But the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise," he said.

"If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months." Vlieghe said there was still a risk that Brexit hits the economy harder. "If that happens, monetary policy would respond appropriately," he said." But for now, it seems the net effect of the many underlying forces acting on the UK economy is that slack is continually being eroded and wage pressure is gently building. —