Risk of interest rate rise as economy rebounds

Julian Harris
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Expectations that interest rates could rise as early as next week saw sterling jump to a three-month high against the dollar yesterday, after three straight days of strikingly positive economic surveys for the UK.

Services, Britain’s largest sector, hit an eight-month high for business activity in January. Yet price inflation in the industry reached its steepest level since August 2008, a Markit/CIPS services PMI survey reported.

“Sterling is drifting higher in line with early expectations of Bank of England tightening,” said currency strategist Lee Hardman of BTM-UFJ.

“Chances of an early hike appear much greater than markets currently price in,” said Michael Saunders of Citigroup.

However, most economists still believe it is too soon for a rise. “I don’t think the Bank will go in February, but it is obviously a risk,” said George Buckley of Deutsche Bank.

The monetary policy committee announces its decision next Thursday.