Pound soars against the dollar as traders bet on interest rate hike

Pound soars as traders bet on interest rate hike: Household braced for higher mortgage costs

The pound soared against the dollar and the euro as investors ramped up their bets on an imminent interest rate hike

Sterling surged above $1.38 for the first time since mid-September on expectations the Bank of England could raise the cost of borrowing as soon as November 4 – two weeks tomorrow.

And in a boost for holidaymakers who have begun to take advantage of loosening travel restrictions in Europe, the pound rose towards €1.19, its highest level against the euro since February 2020 when the pandemic struck.

Rates decision: Sterling surged above $1.38 for the first time since mid-September on expectations the Bank of England could raise the cost of borrowing as soon as November 4 

However, experts warned that an early interest rate rise may be an error that would need to be reversed as the economy weakens.

Rising interest rates would push up the cost of variable mortgages, squeezing the finances of many families already facing soaring energy bills and higher prices.

Laura Suter, head of personal finance at broker AJ Bell, said: ‘Mortgage rates have been at rock-bottom lows for a long time and many homeowners have never known an environment of higher interest rates, so any rise will be a nasty shock for them.’

The latest rally in the pound came after Bank governor Andrew Bailey declared over the weekend that the central bank ‘will have to act’ if inflation threatens to run out of control.

Official figures published today are set to show inflation remaining above the 2 per cent target in September having hit 3.2 per cent in August. The Bank now expects inflation to rise above 4 per cent.

Government borrowing costs have also risen in recent weeks on expectations that rate rises are coming. 

The yield on ten-year gilts – a key measure of government borrowing costs – was hovering close to 1.17 per cent yesterday. That was near last week’s two-and-a-half year high of 1.19 per cent.

Neil Wilson, an analyst at Markets.com, said Bank officials ‘have had numerous occasions to push back against market expectations’ of an early rate hike but have failed to do so.

This, he said, has ‘led traders towards a November hike as being the most likely outcome’.

Investors expect a hike from the record low of 0.1 per cent to 0.25 per cent in early November, when the Bank’s rate-setting Monetary Policy Committee (MPC) next meets.

Traders are betting on a further hike to 0.5 per cent in December followed by three more next year.

That would take rates to 1.25 per cent by the end of 2021 – a level not seen since 2009.

However, some experts believe raising rates on this time frame would be a mistake given the fragile state of the economy and the squeeze facing families and businesses as the cost of everything from gas and electricity to petrol and building materials soars. 

Paul Dales, chief economist at Capital Economics, said ‘worsening product and labour shortages will put the brakes on the recovery’ – making it unlikely for rates to rise above 1 per cent next year.

Jim Leaviss, chief investment officer for public fixed income at M&G Investments, said Bank officials ‘have talked themselves into The Nightmare Before Christmas scenario’ but added: ‘There’s going to be a pullback in growth. It’s hard to see them managing more than a rise or two.’ 

And Mark Dowding, chief investment officer at Bluebay Asset Management, said the rise in sterling could be short-lived.

‘It’s supportive for your currency if you are raising rates because the economy is steaming ahead,’ he said. ‘But if you jack up rates in a slowing economy that’s a different story.’

The Bank cut rates to an all-time low of 0.1 per cent during the pandemic last year, in an effort to boost spending as the economy fell off a cliff. 

But inflation has risen sharply in recent months as the cost of everything from gas and electricity to building materials and eating out soar.

Speaking to international bankers and economists on Sunday, Bailey said the Bank ‘will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations’.

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