Pound sterling gives € 1.20 boost as prospect of interest rate hike in February increases
Rising expectations of a second Bank of England rate hike next month pushed the pound to two-year highs against the euro as Boris Johnson played down the prospect of further restrictions to fight the omicron variant.
The pound is now worth close to € 1.20, its highest level since February 2020. The pound sterling has also gained ground against the dollar, with traders also betting against the gilts as part of expectations of further action from the Bank next month.
UK government borrowing costs at two and ten years peaked in two months, with Mr Johnson saying there was a ‘good chance’ of getting through the latest wave of Covid without harsher action.
Money markets anticipate two 15 basis point rate hikes from Threadneedle Street at its March meeting and nearly a percentage point by year end after its surprise move last month.
Meanwhile, credit-hungry households have racked up the biggest increase in their borrowing in more than a year and have dipped into pandemic savings, raising expectations for further measures.
The Bank’s latest figures for November showed households borrowed £ 1.2bn on credit cards and loans during the month, the highest since July 2020, when the economy reopened after the first Covid lockdown.
Households facing the price hike and the looming Christmas season also saved significantly less over the month, with £ 4.5bn in deposits being the lowest since January 2020 and less than half of the average of the previous 12 months.
The numbers reflect a stronger month for retail sales – up 1.4% in November – as buyers began preparations for the holiday season early, fearing empty shelves and supply shortages.
The relative resilience of consumers comes as soaring energy bills are set to push the Consumer Price Index to a 30-year high of 6pc by April, fueling concerns from rate-setters the Bank about inflation.
The Bank raised interest rates for the first time in three years in December, despite the emergence of the omicron variant that is expected to slow the post-pandemic recovery as hundreds of thousands are forced into self-isolation.
Despite a probable slowdown in December and January, the financial markets still expect a second rate hike by the Bank in February from 0.25 pc to 0.5 pc, with borrowing costs of around 1 pc. ‘by the end of the year.
George Buckley of Nomura expects the Bank to act. ” When you have [longer-term] 2.6 percent inflation if you don’t do anything, it seems to me that an increase of 15 basis points to 0.25 percent isn’t going to reduce the mustard, ”he said.