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Pound surges against dollar on hint of rise in base rate

THE pound has climbed through the $1.70 mark for the first time since August 2009 on the back of strong signals from the Bank of England that benchmark interest rates may rise sooner than was thought.

Sterling, which had surged ahead of the weekend on a speech from Bank Governor Mark Carney, continued its upward path yesterday morning to reach about $1.7010, before easing back a little to trade around $1.6990 in the afternoon.

The pound was solid against the euro, holding on to pre-weekend gains. The euro was trading around 79.8p yesterday afternoon.

Sterling's recent surge against the dollar and euro will make the US and eurozone nations cheaper for people travelling to these countries from the UK on holiday. However, it will crimp UK exporters' competitiveness in the US and in eurozone market places.

In his speech at the Mansion House in London on Thursday night, Mr Carney said: "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

"It could happen sooner than markets currently expect ... . The MPC (Monetary Policy Committee) has rightly stressed that the timing of the first Bank rate increase is less important than the path thereafter."

His comments have fuelled speculation that, after years of unanimity on UK base rates, minutes of the nine-strong MPC's June meeting could tomorrow reveal a split vote.

Analysts have tipped external MPC member Martin Weale as the most likely to be the first to want to move in favour of raising base rates, which have remained at a record low of 0.5 per cent since March 2009.

Michael Hewson, chief market analyst at CMC Markets UK, said yesterday: "Mark Carney's rather surprising, chameleon-like conversion to a much more hawkish tone last week did catch the market somewhat unawares, inviting speculation that there could well be a split vote on rates, when this month's ... minutes get released on Wednesday."

Economists at consultancies Capital Economics and IHS Global Insight are now predicting the first rise in base rates will come in the first quarter of next year.

But Howard Archer, chief UK economist at IHS Global Insight, acknowledged in the wake of Mr Carney's speech that it was "very possible" the first rise in rates could come by the end of this year.

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