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Rate increase may not lift sinking Pound

Sterling is unlikely to strengthen even if the Bank of England raises the interest rate.

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The Bank of England (BoE) is expected to raise its benchmark interest rate tomorrow, 2 August to 0.75 per cent. Despite the market ascribing a 90 per cent probability of a hike, the BoE may catch investors off guard like it did in May by leaving the rate unchanged.

This time seems different

First, the current economic outlook supports an interest rate increase. Inflation is at 2.4 per cent, which is below the May level but still above the BoE’s 2 per cent target. Real wages are also on the rise, boosting consumer spending and pushing prices up.

Second, none of the Monetary Policy Committee’s members have suggested the central bank will not lift rates and instead focused on gradual tightening of monetary policy.

Hazy path   

Brexit, and more importantly the type of Brexit, continues to put pressure on the UK economy. A recent YouGov poll for The Sunday Times newspaper suggested 54 per cent of Brits would vote to stay in the EU, with the remaining 46 per cent for a no-deal Brexit. The poll also suggested 34 per cent of voters would prefer Boris Johnson to negotiate with the European Union.

With just over eight months left until Britain is due to leave the EU, there is still a wide divide within the government, the public and businesses over what type of Brexit is best and what will actually happen.

What about Sterling?

I believe the BoE is highly likely to raise interest rates this week. The key, however, will be in the number of pro-hike votes, as well as whether or not further increases are forecast. A hawkish hike will boost the Pound and could be a turning point for the UK currency, which has been weakening against both the greenback and the single currency this year.

But should BoE Governor Mark Carney surprise market participants again and not hike, then the Pound will continue to drop to as low as $1.2956 against the Dollar, which was recorded in July.

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