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Pound rockets as Bank of England hints at possible interest rate hike

The Bank of England could soon raise interest rates Credit: PA

The pound has rocketed to its highest level against the dollar for a year, after the Bank of England gave its strongest signal yet that it may hike interest rates in the "coming months".

As expected, members of the Bank's nine-strong Monetary Policy Committee (MPC) voted 7-2 to keep interest rates on hold at 0.25%.

But the Bank said that all policymakers believed "some withdrawal of monetary stimulus was likely to be appropriate over the coming months", possibly as soon as November.

With wages stagnating, rising inflation is putting a squeeze on British households.

Raising interest rates could help alleviate that, but the MPC wants greater evidence of economic growth before it deploys the measure.

In minutes of its latest rates decision, the Bank said there was a "slightly stronger picture" for the economy since its forecasts last month, with the housing market strengthening and a rebound in retail and new car sales.

Rising inflation is putting a squeeze on British households Credit: PA

The minutes showed two MPC members - Ian McCafferty and Michael Saunders - repeated their call for an immediate rise to 0.5% in the latest decision, but for the majority of members the outlook for growth is still unclear.

Sterling rose sharply after the rates meeting minutes, gaining 0.5% to 1.33 US dollars, while against the euro, the pound was trading 0.4% up at 1.11.

On Tuesday, the Consumer Prices Index (CPI) showed inflation rose to 2.9% in August as the effects of the Brexit-hit pound continue to feed through.

It is set to climb above 3% in October, higher than the Bank previously expected.

Meanwhile figures on Wednesday showed real pay was 0.4% lower annually - once inflation was taken into account, putting a squeeze on households.

The Bank has been reluctant to raise rates to dampen inflation while growth has been low, But some economists remained sceptical over an imminent hike, given Brexit uncertainties.

A rate rise would come as a blow to millions of homeowners after 10 years of record low borrowing costs.

But some economists remained sceptical over an imminent hike, given Brexit uncertainties.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "We continue to think that GDP growth and domestically generated inflation will be too weak for the MPC to raise rates over the next year, but it's clear now that it would not take much of an improvement in either to spark the MPC into action."

Andrew Sentance, senior economic adviser to PwC and a former MPC member, warned over a shock to the economy if the Bank does not act soon to raise rates.

He said: "By continually delaying the first move in this direction, there is an increasing risk that when interest rates do start to rise, it will take consumers and borrowers by surprise."

The Bank has been reluctant to raise rates to dampen inflation while growth has been meagre, at 0.3% in the second quarter, although the MPC minutes showed a brighter outlook with consumer demand and exports set to strengthen.

However, it warned there are still "considerable risks to the outlook" amid uncertainty caused by Brexit negotiations.