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Bank of England stance emboldens bets for rate increase in May
[LONDON] Investors betting the Bank of England (BOE) will raise interest rates again as soon as May just got a boost.
BOE chief economist Andy Haldane's comment on Wednesday that the long-awaited pickup in wages "is starting to take root" saw the pound pare a decline and pushed up the market-implied probability of a rate increase in less than three months from now. The odds of a May hike as priced by money markets now stand at 83 per cent, up from 78 per cent earlier in the day and just 51 per cent before the central bank's last meeting on Feb. 8.
"There's very much a presumption that if the BOE is right on wage expectation, that will have supportive elements for rates and ultimately for sterling," said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce.
The pickup in rate-increase expectations comes at a time when the UK and the European Union are still wrangling over Brexit negotiations and wage data in Britain is yet to signal solid growth.
Even amid hawkish BOE signals, room for sterling gains continues to be limited by the "overarching" issue of Brexit, according to Stretch.
"There is a degree of scepticism how quickly wage growth will come through," he said.
"If you're an international investor trying to decide whether you want to be long sterling or not, the news on Brexit negotiations are going to oscillate in the background. All in all, it is becoming difficult for sterling to break through all that noise."