The Brexit-battered pound hit a 14-month high against the dollar on Friday as a Bank of England policymaker reiterated the possibility of a looming interest rate rise.
Gertjan Vlieghe supported the view, expressed by a majority of the nine-member monetary policy committee (MPC) at Thursday’s meeting, that rates could rise in the “coming months” to help keep a lid on inflation should it continue to grow as expected.
In a speech to a conference in London, the economist said: “There remains a risk that, at some stage, the uncertainty surrounding the Brexit process has a larger impact on the economy than we have seen so far.
“If that happens, monetary policy would respond appropriately.
But for now, it seems the net effect of the many underlying forces acting on the UK economy is that slack is
continually being eroded and wage pressure is gently building.
“If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.”
It was revealed earlier this week that the annual rate of inflation had hit 2.9% in August – with real wage growth in decline as the latest average increases were static at 2.1%.
Much of the increase in inflation – and the wage growth apathy – can be explained by uncertainty linked to the Brexit vote.
In sterling’s case, the pound slumped against a basket of international currencies following the EU referendum result.
The consequence of that has been a steep increase in import costs – with those increases being passed on accounting for the leap in consumer prices.
Sterling has since recovered some poise – soaring to a high of $1.3590 on Friday for the first time since its crash to $1.32 after the Brexit vote.
It was also higher versus the euro at just over 88p.
Market participants saw the currency shift as a realisation that a rate hike was likely, given that inflation is tipped to hit 3% before next year.
Neil Wilson, senior market analyst at ETX Capital, said: “This does not mean the start of a tightening cycle as we understand them necessarily, but at least a ‘correction’ to the Bank’s cut last August.
“Indeed with sterling now back to more sensible levels it will no doubt raise debate again about whether the Bank should have cut rates given that the collapse in sterling is what’s driving inflation.”