Sunday 25 February 2018

Sterling bounces back versus euro on rate hike chatter

Bank of England policy maker Kristin Forbes sees scope to start raising interest rates
Bank of England policy maker Kristin Forbes sees scope to start raising interest rates
Donal O'Donovan

Donal O'Donovan

Sterling headed into the weekend set to clock up its first weekly advance against the euro since the end of July, a boost to Irish exporters.

After being driven lower for much of the year thanks to the European Central Bank's quantitative easing (QE), the euro has stregthened against the pound since July.

Along with German government bonds, the euro is seen by some as a haven from Chinese and emerging markets linked volatility, especially since the latest Greek crisis subsided.

That perception shifted again in recent days. The pound headed for its biggest weekly gain versus the dollar since June as an inflation survey supported the view of Bank of England officials' contention that UK economic growth is on track.

Sterling gained after policy maker Kristin Forbes said there was scope to start raising interest rates sooner rather than later.

Raising rates effectively limits the amount of sterling in circulation, which tends to drive up its value relative to other currency.

The risk of dangerously low inflation in the euro area means a euro rate hike is a long way into the future.

The reduction in the value of the euro as a result of QE is one of the positive "tailwinds" along with low oild prices that has helped drive growth in the Irish economy at a higher pace than expected, Finance Minister Michael Noonan said last week.

Sterling was little changed versus the euro on Friday even as a report showed construction unexpectedly contracted in July.

Mortgage lender Halifax said on Thursday that house prices surged UK 2.7pc in August, the most since May 2014.

"Sterling's recent appreciation could create less drag on import prices and inflation than we might have expected if the levels of pass-through seen after the crisis persisted," Ms Forbes said in a speech in Cardiff yesterday.

"If this plays out, monetary policy would need to be tightened sooner than based on the older models."

The UK currency has climbed 1.6pc versus the dollar this week, which would be the biggest gain since June 19.

Sterling was at 73.08 pence per euro, leaving it with a 0.5pc gain since September. 4. The Bank of England's Inflation Attitudes Survey, which was based on a GfK poll of 2,051 people taken on August 6-11, showed that respondents expected inflation to reach 2pc in 12 months' time.

While that's lower than the 2.2pc recorded in May, it compares with an actual rate of 0.1pc in July.

The central bank's target for the inflation rate is 2pc. (Additional reporting Bloomberg)

Irish Independent

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