Pound jumps as City A.M. reveals more momentum behind rise in interest rates

STERLING jumped to a three-month high against the dollar yesterday, after markets reacted to hawkish comments from Bank of England rate setters Andrew Sentance and Charles Bean.

In an exclusive interview in City A.M. yesterday, Sentance suggested that the Bank’s monetary policy committee (MPC) was getting closer to a rise in interest rates as inflation increasingly threatens its credibility.

And the Bank’s deputy governor Charles Bean also hinted of a move towards a tightening of policy.

The pound hit $1.623 following the news, before ending the day on $1.617.

“The British pound received a slight boost this morning after Andrew Sentence, the long standing hawk among the MPC, reiterated his stance that interest rates need to be raised now or risk having to make larger adjustments down the line,” said Duncan Higgins at Caxton Fx.

And if global commodity prices stay high in the medium run, the Bank may be forced to act, Bean admitted.

“We may well have to respond to that by keeping domestically-generated inflation lower,” he said.

Both Sentance and Bean cited the severe winter weather for an apparent contraction in the UK economy at the end of 2010, suggesting the negative results would not rule out a hike in rates.

In May Sentance ends his term on the MPC, with the Treasury set to decide who will replace him on the committee.

MPC HOPEFULS | SOME LEADING CANDIDATES TO REPLACE SENTENCE

Vicky Pryce
With no women currently on the committee, there is pressure from some circles to use Sentance’s departure to address the gender balance. Sentance wishes to be replaced by a member with business experience, and Pryce has it in abundance, having held senior positions at Exxon, KPMG, Williams & Glyn’s Bank, and now finance consultancy FTI.

John Muellbauerr
With most of the Bank’s rate setters sitting on the fence by voting “ no change” month after month, opinionated professor Muellbauerr would certainly liven up proceedings. Muellbauerr recently attacked Labour’s “host of bureaucratic interventions” that resulted in a “failed” housing policy. An applied macroeconomist, he is currently a professor at Oxford university.

John Llewellyn
Llewellyn spent almost a decade on the other side of the “Oxbridge” rivalry at Cambridge university, as well as 17 years at the Organisation for Economic Co-operation and Development. He also satisfies Sentance’s criterion for business experience, having worked at Lehman Brothers for 14 years, and now runs his own consultancy.