By Sujata Rao
LONDON – Sterling reversed earlier losses on Thursday and moved higher after Bank of England policymaker Michael Saunders said the central bank could decide to halt its bond-buying programme early because of an unexpectedly sharp rise in inflation.
Money markets repriced interest rate expectations after his comments to price some 18 basis points of policy tightening by June 2022, compared to just 10 bps before, while two-year gilt yields rose to the highest since April 2020.
The pound rose 0.2% against the dollar at $1.389 after Saunders’ comments, having earlier fallen as low as $1.381, but by 1525 GMT, it was trading flat at $1.386 as U.S. jobs data lifted the dollar against peers.
Sterling firmed against the euro to 85.2 pence, up 0.2%, while staying off 3-1/2-month highs touched on Wednesday. (Graphic: GBP positions, https://fingfx.thomsonreuters.com/gfx/mkt/dgkplrorapb/GBP%20positions.JPG)
Saunders’ comments add to signs of a change in stance at the BoE, where departing chief economist Andy Haldane had until recently been the sole voice advocating considering an end to pandemic-time stimulus.
On Wednesday, BOE Deputy Governor Dave Ramsden said inflation could hit 4% this year, forcing the bank to reverse monetary stimulus sooner than expected.
“We’ve seen the momentum shift in recent days when it comes to BoE policy tightening expectations. Two members now look to be pushing back on the prevailing dovish (inflation is transitory) view set out by Governor Bailey,” said Valentin Marinov, head of G10 FX at Credit Agricole.
“The pound seems supported by its growing rate advantage versus the euro and the dollar…Indeed, the rates markets remain convinced that the BoE will start normalizing policy next year.”
Saunders spoke after data showed 356,000 jobs added in June from May and the fastest headline wage growth in the year to May since records began in 2000. A day earlier, data showed inflation had risen 2.5% in the 12 months to June, well above the central bank’s target.
However, the pound hasn’t shaken off fears that Britain’s decision to fully reopen the economy from July 19 could prove premature, given the rapid spread of the more infectious Delta variant of COVID-19.
Britain recorded 48,553 new coronavirus infections on Thursday, and 63 deaths within 28 days of a positive test.
“Sterling feels like it’s pricing in that the economy is reopening too early,” said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.
“A few months back it looked like the UK was way ahead in terms of vaccinations but what the market was not anticipating was the rise in the Delta variant.”
There are concerns too about the end of job subsidies, which supported 2.4 million jobs at the end of May but are being phased out by the end of September, making it likely that unemployment will rise again.