Euro jumps against sterling on rate call

Frankfurt (Aug 7) The euro surged against sterling yesterday after the Bank of England unexpectedly signalled that a possible rise in interest rates will be later rather than sooner.

The rise in the euro will be unwelcome for Irish exporters who have seen a huge rise in price competitiveness selling their goods and services into Britain because of weakness of the single currency over many months.

However, the euro has slid about 10% against sterling in the past year and though “chunky”, yesterday’s intra-day move may not erode too much of the price gains for Irish exporters, said Philip O’Sullivan, chief economist at Investec Ireland.

Loretta O’Sullivan, group chief economist at Bank of Ireland, in a quarterly outlook, said that exports “look set to register strong growth again this year”.

“The depreciation of the euro against sterling and the dollar is providing support to firms exporting to the UK and US, while the recovery in the euro area — Ireland’s other main trading partner — is gaining ground,” she said. There remains a wide range of forecasts on exactly when the Bank of England will raise rates.

Its decision has important consequences for the euro exchange rate. The bank pointed to a possible increase in interest rates early next year, after only one of its top policymakers backed an immediate move. It also forecast a slow pick-up in inflation thanks to a strong pound.

As a result sterling fell sharply and investors briefly pushed back their bets on a first rate increase until June next year, before Bank of England governor Mark Carney said the time was getting closer for the bank to start undoing its stimulus for Britain’s economy. He also warned markets not to be too relaxed.

“The market curve does not deliver a sustainable return of inflation to target, because there is an overshoot,” he told a news conference.

The bank slashed interest rates to 0.5% in the depths of the financial crisis in 2009 and has kept them there ever since. However, with the economy now recovering strongly and wages finally rising quickly, speculation is growing about when it might decide to start weaning Britain off low rates.

Investors were taken by surprise earlier when the bank said only one of its nine policymakers had voted for a rate rise at their August meeting. Most economists taking part in a Reuters poll had expected two or even three members of the monetary policy vommittee to vote for a rise. The surprise 8-1 result prompted markets to push out their bets on a first rate increase.

Source: IrishExaminer