Pound jumps as BoE hints at rate rise in May

GettyThe Bank of England has kept interest rates unchanged

The Pound was boosted during late morning and noon trading Friday after the Monetary Policy Committee member Gertjan Vlieghe told an audience at a Confederation of British Industry (CBI) event the current robust state of the United Kingdom labour market probably warrants a sustained tightening cycle from the Bank of England (BoE).

The Old Lady of Threadneedle Street raised rates for the first time in 10 years last November, and is set to do so once or twice in 2018.

The bank had hiked the rates to 0.5% last November, the first increase in a decade.

The central bank, however, made clear it is ready to raise interest rates at its next meeting in May.

"As ever the Bank is at pains to point out that the pace of interest rate rises will be gradual".

Sterling hit a one-month high against the US dollar and the BoE-sensitive, two-year gilt yield touched its highest since 2011 after the data on Wednesday.

The Bank of England's Monetary Policy Committee as a whole voted 7-2 to keep rates at 0.5% but said "ongoing tightening" was likely to be needed to return inflation of 2.7% back to target.

The world economy is growing at its fastest since the financial crisis, helping Britain at a time when it is suffering from uncertainty about Brexit. While the BoE sat tight this time around, minutes of the meeting that ended on Wednesday firmed up market expectations that it will raise its key rate by a quarter-point at its next gathering in May. Even the European Central Bank - which is still struggling with anemic price growth - has its eye on phasing out its massive bond purchases.

GettyGovernor of the Bank of England Mark Carney
GettyGovernor of the Bank of England Mark Carney

However, Britain's growth outlook remains muted.

Though annual inflation in February fell to an annual rate of 2.7 percent, wage growth is picking up and that should support spending and inflation.

The Bank of England kept rates steady today but two of its policymakers unexpectedly voted for an immediate rate rise, in a statement that will boost investors' confidence that borrowing costs will rise in May.

Average wage growth has also moved closer to inflation meaning consumers are not seeing wages decrease whilst the costs of goods increase.

Minutes of the latest MPC meeting revealed Ian McCafferty and Michael Saunders voted to raise rates to 0.75% amid concerns over inflation as wage growth has started to pick up.

However those slipping inflation figures were more or less brushed aside by chief economic adviser to the EY ITEM Club Howard Archer.

"Given the fact that economic data has not been altogether positive in the past month, this will likely underline the Committee's resolve to begin the slow process of normalising monetary policy in the face of still stubbornly high inflation, but very tepid growth", Metcalfe said.

The only major South African data to watch out for next week will come at the end of weekly trading, when the trade balance for February is announced.

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