Mark Carney, Governor of the Bank of England (BoE), surprised markets in a speech last night by stating that interest rates may well increase earlier than currently forecast. Market speculation is that the first increase could now be later this year. He did caveat this statement by saying the increases would be gradual and to a level significantly lower than the 5% previously thought as standard. Sterling is now at levels against the euro last seen in the autumn of 2012, just after the Olympics, and it made significant gains across the board overnight. Mark Carneys statement contrasted with the comments from the UK Chancellor George Osborne earlier in the day that the BoE would gain powers to cap mortgage lending ratios which had undermined sterling.
So the interest rate genie is out of the bottle and will help underpin sterling’s strength in the short to medium term. Greater clarity will be required as to when and by how much interest rates will increase but given this is the most clear message of intent from the BoE we may well see sterling benefit further.