As British economy expands, pound has best start since 2009. Sign traders believe higher U.K. interest rates are coming.
Britain’s currency has gained 4 % this year on a trade-weighted basis. According to Bank of England officials, the next move in interest rates is likely to be up and a slowdown in inflation is temporary. Sterling reached the strongest level in seven years against the euro on the last week of February 2015 as data confirmed the U.K. gross domestic product (GDP) grew for an 8th consecutive quarter. The pound touched an 8-week high versus the dollar.
“We’re still expecting a rate hike at some point and the GDP figure came out in line with economists’ forecasts”, said Harry Adams, head of trading at Argentex LLP, a currency advisory company in London. “As long as we stay on the same track, I don’t see the pound weakening off substantially.”
According to an index comprising the currencies of its major trading partners, the pound was set for its best start to a year since 2009, when it gained 5.8 % in January alone. While other European central banks are easing monetary policy, the Bank of England has signaled that it is still moving toward its first rate increase since 2007.
The U.K. economy expanded 0.5 % in the fourth quarter of 2014, matching an initial estimate, according to the Office for National Statistics. GDP increased 0.7 % in the 3 months through September.
In a testimony to U.K. lawmakers on 24th February, BOE Governor Mark Carney said that officials can look through deviations in inflation that are largely caused by energy and food prices. Monetary Policy Committee member Martin Weale stated that the benchmark rate may rise earlier than markets expect.
Investors are currently pricing in a 96 % chance of a 25 basis-point increase in borrowing costs by April 2016, according to MPC-dated forward Sonia fixings. That assumes the current three basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises rates.
To sum up, U.K. economy is getting stronger as pound strengthens and GDP grows. Consequently, the rise of interest rates is predicted in the nearest future. So if you are thinking of establishing your business in Britain, don’t miss the most appropriate moment that has come. MN Consulting will assist you with administrative, financial and legal solutions in all stages: from evaluating business idea, searching optimal ways of financing the project to running a company in the U.K.
Anna Maximova, PhD in economics
(Adopted from Bloomberg business news)