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London - A surge in sterling on robust British economic data and safe-haven demand due to Greece has raised questions over whether the Bank of England (B0E) will begin lifting interest rates as quickly as some anticipate.
Market expectations as indicated by the sterling overnight indexed swaps curve, suggest the BoE will follow the US Federal Reserve to become the second major central bank to lift interest rates from their crisis-era lows. Economists and some in the market are pencilling in the initial hike in the first quarter of 2016.
But a stronger currency tends to lower inflation, and this - plus the prospect of further growth-sapping fiscal tightening by the Conservative government -- has persuaded some analysts to say that the BoE could hold rates lower for longer. That would disappoint sterling bulls.
The pound touched a seven-year high on a trade-weighted basis on Tuesday, bolstered by expectations the BoE will raise rates for the first time since July 2007 towards the end of the first quarter of 2016.
The market had been predicting a hike from 0.5% in the second quarter but shifted its view last week after data showing wages grew at their fastest rate in nearly four years in April and signs of further improvement in the labour market.
"A rising pound which will eat into any gains in inflation, will have implications for monetary policy," said Geoff Yu, strategist at UBS. He added that persistent disinflationary conditions and uncertainty in the eurozone - the UK's biggest trading partner - could see rates remain lower for longer.
British consumer prices rose a measly 0.1% in the 12 months to May, recovering from a fall of 0.1% in April. Earlier this year, BoE Governor Mark Carney said the impact of rising sterling on inflation could last for some time.
Many speculators are yet to buy into the view that sterling is in for a lengthy period of gains. Data from the Commodity Futures Trading Commission showed speculators still held large bets against the pound, although they have been trimming those positions.
