Pound ticks up on Bank of England policymaker's rates rise comment

·3 min read
Close-up of British bank notes
Sterling is currently trading 0.3% higher against the greenback at $1.4161. Photo: Getty Images

The pound (GBPUSD=X) rose against the dollar on Thursday afternoon, after Bank of England (BoE) policymaker Gertjan Vlieghe said it was possible that UK interest rates could rise sometime next year, up from the current record low of 0.1%

Sterling is currently trading 0.3% higher against the greenback at $1.4161, while it pushed 0.4% up against the euro (GBPEUR=X) at €1.1618.

Vlieghe is part of the BoE's Monetary Policy Committee, but he is due to leave it at the end of August.

Speaking at a lecture at the University of Bath, he said the timing of the rate increase would depend on how the economy "transitions out of furlough."

He said he is worried there could be "a modest rise in the unemployment rate, while the economy’s supply potential is somewhat less adversely affected, so that there is still some excess supply around the turn of the year."

"In that scenario, the first rise in bank rate is likely to become appropriate only well into next year, with some modest further tightening thereafter."

The pound rose on Thursday afternoon. Chart: Yahoo Finance UK
The pound rose on Thursday afternoon. Chart: Yahoo Finance UK

However, "should the transition out of furlough happen more smoothly, with the unemployment rate at or a little below current levels by the end of the year, with associated signs of upward inflation and wage pressure beyond the temporary and base effects, then a somewhat earlier rise in bank rate would be appropriate."

Read more: European stocks subdued as rising COVID infections cause concern

Daniel Takieddine, senior market analyst at trading platform FXPRIMUS, told Yahoo Finance UK that Vlieghe's suggestion of an increase in rates "is driven by sustained growth in economic numbers, vaccinations and the end of full lockdowns in the UK."

The Bank "now has eliminated the chance of the bold monetary policies like negative interest rates and is looking forward to tightening its policies as long as the mandates stay sustained," he added.

Meanwhile Vlieghe aso said economic recovery might be hindered by concerns over new coronavirus variants which "continue to weigh on demand, which in turn results in more adverse unemployment dynamics".

"In that case, it is still possible that monetary policy might be required to simulate the economy a little further."

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Chief market analyst at Ava Trade Naeem Aslam had said that "the UK government is actively monitoring the Indian variant zone. So far, traders do not believe that the variant is going to deter the government’s plan of further relaxing the coronavirus-related restriction."

Earlier, the pound had an "uneasy session" following an "explosive testimony from the former chief adviser to [UK prime minister] Boris Johnson combined with rising COVID-19 case numbers," said Jeremy Thomson-Cook, chief economist at international business payments specialist Equals Money.

He was referring to Dominic Cummings telling MPs that tens of thousands of people died unnecessarily because of the government's failings over the pandemic, and that Johnson is "unfit for the job".

While this "will rumble on in the papers until the key players themselves give evidence to parliament, the virus picture in the UK has started to worsen," said Thomson-Cook, adding that "we will have to hope that packed trains and offices are balanced out by the vaccine drive."

Watch: Will interest rates stay low forever?