Sterling FALLS ahead of BOE interest rate meeting

View of the City of London

David Lamb, head of dealing at FEXCO Corporate Payments, said: "After weeks of hints and hopes, the Bank of England is on the verge of raising interest rates for the first time in a decade".

The Bank is looking to cool surging inflation, which has been sent higher by sharp falls in the pound since the Brexit vote.

BoE Deputy Governor Ben Broadbent said on Friday that the Bank's signal that it may need to raise interest rates two more times is "not a promise", responding to a question about the BoE's previous attempts to signal the likely path for interest rates, which were knocked off course by twists and turns in the economy.

With the BoE expected to raise rates against the backdrop of weaker economic growth reported than before any other rate hike in the past 20 years, close attention will also be paid to the concomitant publication of its quarterly Inflation Report. "All members agree that any future increases. would be expected to be at a gradual pace and to a limited extent", the BoE said in a summary of its decision.

Sterling fell to one-week lows against the euro following the decision, with advancing 1.21% to 0.8878 from 0.8758 earlier.

Sterling has been on the up this week, as markets prepare for a potential interest rate hike.

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This doesn't mark the start of a rate-hike cycle, like the one the US.

But the Bank also said its forecasts are based on the assumption of a "smooth adjustment" of the United Kingdom economy to Brexit, something that has been thrown into increasing doubt by the failure of the Government to make any substantive progress in its Article 50 divorce negotiations with the European Union. "And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures".

A quarter-point rise will only take rates back to where they were before the last cut in August 2016, meaning that any impact is expected to be modest. So that means only one rate increase before Britain is scheduled to leave the European Union in March 2019.

He also pointed out that the rise takes rates back to where they were 15 months ago and those that have so far failed to take advantage of the record low fixed deals will find that rates have already edged up as expectation of a rate rise increased. The Bank says this effect is probably at its peak at the moment.

It would be different were there any sign of wages starting to follow prices higher but, in fact, annual growth in pay is continuing to lag well behind inflation.

Consumer Prices Index (CPI) inflation hit 3% in September - its highest level for more than five years - and the Bank has warned it could rise further still.

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