Emboldened Pound Bulls See BOE Raising Rates Twice This Year
(Bloomberg) -- The pound’s prospects look bright.
That’s if you believe analysts who are forecasting two interest-rate increases by the Bank of England this year. Money markets are pricing in just one, in May.
While a 25-basis-point hike at the next Monetary Policy Committee gathering is almost priced in, 13 out of 31 respondents in a Bloomberg survey predict that the official bank rate will reach 1 percent by year-end, from 0.5 percent currently. The odds of a 25-basis-point rate hike in May are around 85 percent, with a 68 percent chance of a further increase in November, according to money markets.
Two of the nine MPC members voted Thursday for an immediate hike, a slightly hawkish surprise to investors expecting a unanimous decision to keep rates on hold. Danske Bank A/S and Nomura International Plc both predict two more increases this year, which could mean sterling’s recent bull run will persist well into 2018 and beyond.
“The main reason why we expect the BOE to hike twice is that they have launched a regular hiking cycle,” said Mikael Olai Milhoj, a senior analyst at Danske Bank. “They seem concerned about combination of excess demand, higher wage growth and already high inflation. BOE rate hikes support our call for lower euro-sterling.”
The pound will strengthen against the euro as the market continues to price out Brexit premium risk, Copenhagen-based Milhoj said. Danske sees the pound at 86 pence per euro in six months, from around 87 pence Thursday, and reaching 84 pence in 12 months. The bank sees sterling rising to $1.49 by the end of 2018 and $1.52 in early 2019, one of the most hawkish calls in the Bloomberg survey.
For strategists at Nomura, the pound’s ascent would be more pronounced against a faltering dollar. They see the currency climbing to $1.48 by year-end, from around $1.41 Thursday.
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