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Pound Sterling: Bailey Sends Strongest Signal Yet a Rate Hike is Coming

- Bailey signals 2022 rate hike
- GBP goes higher in response
- But unable to hold gains
- Suggests hike story now in the price

Bailey

Image © Pound Sterling Live, Still Courtesy of Bloomberg TV.

  • Market rates at publication:
  • GBP/EUR: 1.1653 | GBP/USD: 1.3774
  • Bank transfer rates: 1.1430 | 1.3490
  • Specialist transfer rates: 1.1600 | 1.3680
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Pound Sterling rallied following a further boost to expectations that the Bank of England would raise interest rates in the first half of 2022, although gains were soon relinquished.

The Bank of England validated the market's expectation that a rate rise is likely in the first half of 2022 following an unexpected revelation from its Governor.

Andrew Bailey told lawmakers there was a 4-4 split between members of the eight-person Monetary Policy Committee (MPC) as to whether the economy had recovered enough to meet the minimum conditions needed to start to raise interest rates.

The frank revelation suggests the Bank is closer to raising rates than had previously been thought.

"Let me condition this by the fact that it was an unusual meeting because there were only eight members of the committee - so it actually was four-all," Bailey told the Treasury Select Committee of the House of Commons in a regular testimony.

The official vote tally from the August MPC meeting showed an 8-0 vote for keeping rates unchanged.

Bailey said that while 4 members of the committee viewed the minimum conditions for a rate rise as having been met he said conditions were not yet sufficient.

At the least it is expected the MPC will want to see quantitative easing end in December before raising rates.

Bailey, Ben Broadbent and Dave Ramsden all told the Committee they believed the minimum conditions had been met for a hike.

Silvana Tenreyro said they had not.

Michael Saunders who was not present at the testimony likely thinks conditions have been met given he was the only one to have voted in August to end quantitative easing ahead of the December deadline.

(Saunders brandished his hawkish credentials earlier this week in an online seminar).

This suggests the remaining members of the MPC did not expect conditions to have been met: Gertjan Vlieghe, Jon Cunliffe and Jonathan Haskel,

The British Pound briefly rallied following Bailey's comments.

However, the Pound has failed to build any real momentum: the Pound-to-Euro exchange rate remains stuck at 1.1647 at the time of writing on Thursday.

The Pound-to-Dollar exchange rate is on course for a fourth consecutive daily decline and is at 1.3770.

The Pound this week

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Sterling's inability to hold gains suggests perhaps the 2022 rate hike narrative has been fully baked into the currency's price.

To rise further the market will want to see evidence that additional rate hikes lie on the horizon.

This could yet be the case as Bailey now appears concerned that high inflation could become more persistent.

The Bank of England's economists hiked their inflation forecast for 2021 in their August Monetary Policy Report to show a peak of 4.0% was now likely.

The Bank does however maintain a view that inflation will then fall back sharply in 2022.

But Bailey told MPs that while some pressures such as higher commodity prices and supply chain bottlenecks could fade, he had a "bit more concern about persistence in the labour market story".

Should inflation stay persistently above the Bank's 2.0% target then the need to raise interest rates becomes more pressing.

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Bailey told MPs that the end of the furlough scheme this autumn ought to help with current worries about "getting jobs filled" amid record vacancies across the economy.

Economists have long warned that the ending of the Government's job support scheme would lead to a jump in unemployment, however given businesses are struggling to fill vacancies the ending of furlough could prove to be a boon for the economy.

Furlough will end in September and an additional supply of workers could accelerate the economic rebound into year-end.

The Bank of England looks set to raise rates in the first half of 2022, which is before both the Federal Reserve and European Central Bank.

This should keep the Pound supported against both the Euro and Dollar, but for it to fly higher the market will require evidence that further rate rises are becoming visible on the horizon.

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