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Pound jumps after hint of interest rate hike
LONDON—The pound jumped on Friday to reach its highest level against the dollar in nearly five years after the Bank of England’s governor predicted an interest rate hike might come sooner than expected. The British currency rose to US$1.6960 from US$1.6830 the day before after Mark Carney said an interest rate rise from its current record low of 0.5 per cent, “could happen sooner than markets currently expect.” The last time the pound traded above US$1.70 was in August 2009.
Carney hedged the hint by telling an annual banquet of bankers that the Bank of England is not pre-committed and would make its decisions according to incoming economic data. But the warning nevertheless surprised economists and traders, many of which had been forecasting the first rate hike to come in the spring next year. With the economy strengthening and the unemployment rate dropping to 6.6 per cent in the three months ending in April, the pressure to raise rates sooner has increased.
Economists quickly updated their forecasts, with some predicting a rate hike by early 2015, or even sooner. Carney’s first year in office has been defined by a “forward guidance policy,” which kept rates low and closely tied an interest rate rise to a drop in unemployment. But as the economy strengthened and unemployment fell below the level where a rate rise would have been considered, that “forward guidance” passed into history.