Sterling hits four-week high vs dollar as rate hike anticipation builds

© Reuters. FILE PHOTO: British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo/File Photo

LONDON(Reuters) – Sterling hit a four-week high against the dollar on Tuesday as expectations mount that central bank policymakers will act as soon as November to hike interest rates in a bid to curb inflation.

Bank of England Governor Andrew Bailey on Sunday sent perhaps the clearest signal yet of a pending hike, saying the BoE will “have to act” to deal with rising energy costs in Britain which threaten a surge in consumer prices.

While many countries share Britain’s problems of supply chain disruption, labour shortages and soaring energy prices, investors have singled it out as a country especially prone to inflation due in part to Brexit exacerbating bottlenecks.

A November hike could make the BoE the first major central bank to increase rates since the beginning of the COVID-19 pandemic early last year.

Bailey’s comments had an immediate impact on bond yields on Monday, with yields on 2-year UK gilts (+13.1 bps) seeing their biggest daily rise since August 2015.

The pound on Tuesday rose 0.4% to $1.3784, a level last seen on Sept. 17.

Sterling edged down against the euro after nearing a 20-month high on Monday as investors weighed what rate hikes could mean for economic growth.

“If the BoE raises rates because of inflation, that will handicap growth next year,” said Kenneth Broux, FX strategist at Societe Generale (PA:SOGN).