Sterling has become the best performing currency for the year to date out of the G10 group of major currencies, figures show. The pound gained 4.7 percent against a weaker dollar and ahead of an expected interest rate hike from the Bank of England (BoE) on Thursday (May 11).
G10 currencies, which are among the world’s most popular, include the pound, US dollar, euro, Japanese yen, Australian dollar, New Zealand dollar, Canadian dollar, Swiss franc, Norwegian krone and Swedish krona.
Markets expect the BoE to raise base rate by 25 percentage points on Thursday, pushing the key rate up to 4.5 percent as the Bank battles to bring down Britain’s double-digit inflation of 10.1 percent.
The decision will come with the BoE’s quarterly Monetary Policy Report as well as the minutes of its rate-setting meeting.
Investors will be closely watching Thursday’s press conference with Bank Governor Andrew Bailey for clues as to what the Bank will do next.
Economists have said the BoE is not ready to stop raising interest rates with soaring food prices keeping inflation elevated in the UK.
UK Consumer Prices Inflation (CPI) remained stuck in double digits in March, squeezing household budgets and proving more stubborn than analysts had expected.
Economists at Oxford Economics said they expect another 0.25 percentage point increase on Thursday.
Chief UK economist Andrew Goodwin said: “Ahead of the May meeting, the Monetary Policy Committee (MPC) can justifiably argue that the criteria for tightening monetary policy further, that it set out in the March policy statement, have been met: the labour market is still tight and wage growth and services inflation remain stubbornly high.”
Official figures show earnings grew by 5.9 percent in March although wage growth is still being stripped out by soaring costs.
The Office for National Statistics found vacancies fell slightly, but remain at very high levels amid an ongoing shortage of workers.
It all impacts on the MPC’s interest rate decision because its role is to bring inflation back down to its two percent target.
Laith Khalaf, Head of Investment Analysis at AJ Bell, said the inflationary picture is not benign in the UK.
He said: “CPI still stands in double digits, which means that everyone is expecting a rate hike from the Bank of England at the forthcoming policy meeting.
“In stark contrast to the US, markets are then expecting one further rate hike, possibly two, to be pushed through.
“The UK’s headline inflation rate is running around twice that in the US, so it’s easy to see why we might have to swallow another few doses of monetary medicine.”
The Fed decided on Wednesday to raise interest rates by 0.25 percentage points, but hinted it could be the last hike before rates start to come back down.
It follows a period of turmoil in the global banking sector with a number of US regional banks collapsing, leading to fears high rates were piling pressure on banks in the world’s largest economy.
British banks have brushed off concerns they have been caught up in the turbulence, insisting their balance sheets are strong and resilient.
The European Central Bank (ECB) also opted to slow the pace of rate hikes, pushing through a 0.25 percentage point increase on Thursday.
But the ECB left the door open for further hikes, with president Christine Lagarde saying the inflation outlook continues to be too high for too long.
