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Markets update

Sterling soars as Bank holds interest rate

London Stock ExchangeSterling soared to a year high against the dollar today after the Bank of England’s Monetary Policy Committee voted 7-2 to hold the interest rate at its historic low of 0.25%.

Committee members Ian McCafferty and Michael Saunders again voted to raise the interest rate and the committee indicated that a rise was likely this year.

David Lamb, head of dealing at Fexco Corporate Payments, said pressure for a rise was becoming irresistible.

The Bank of England’s shift to a more hawkish position is tectonic – agonisingly slow but seemingly unstoppable,” he said.

“Currency bulls have been energised by the Bank’s revelation that its money-printing stimulus programme could be reduced in coming months.

“The hawkish momentum is clearly building. With the Bank now predicting that inflation could breach 3% in October, the pressure to raise rates will eventually become all but irresistible.”

Howard Archer, Chief Economic Advisor to the EY ITEM Club, said the MPC minutes came across as “more hawkish” and noted that the committee warned that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”

 “Inflation is now seen rising above 3% in October,” he said. “However, the MPC did have some reservations over the outlook. 

“With reduced confidence, we still lean towards the view that the Bank of England will hold off from raising interest rates until late-2018.

“This is based on our belief that the economy is likely to remain stuck in low gear over the coming months, inflation is likely to ease back steadily after peaking around 3% in late-2017 and Brexit uncertainties will remain high.

“But it is undeniable that an interest rate move before the end of next year has recently become a closer call.”

Investors had expected a no-change decision and the FTSE100 was lower in early trading ahead of today’s statement.

Asian markets were trading lower this morning, while US stocks made further progress overnight.

Deutsche Bank’s Oliver Harvey thinks the risks are that the MPC sounds increasingly uncomfortable about a sleepy market attitude towards interest rates.

He thinks the BoE are increasingly sceptical about the benefits of a falling currency from a growth perspective, notwithstanding the impact on inflation persistence.

Overall the bank continues to expect rates to remain on hold until uncertainty about the Brexit transition diminishes.

Fashion group Next led the blue-chip board in early trading after it weathered a difficult first half and reported sales and profits in line with its cautious forecasts.

Pre-tax profits and sales were down on a year ago but investors were encouraged by the increase in Next’s directory business, which includes its catalogue and online divisions.

AJ Bell Investment Director Russ Mould said: “While the trading environment remains difficult, the group’s prospects appear to be less challenging than six months ago with price inflation set to moderate.”

Next’s shares were up by more than 7.9% in early trading.

International support services and construction group Interserve’s shares plummeted after it warned its full-year results were likely to be significantly below previous forecasts.

“UK trading in July and August was disappointing, particularly in support services,” said Mr Mould, “but also in its construction division and the cost of exiting its energy from waste contracts now look set to exceed the £160m initially expected.”

Interserve’s shares were down by more than 49.3%

GVC Holdings topped the FTSE250 following a 99% rise in first half adjusted after-tax profits. Progress since last year’s acquisition of bwin.party has been ahead of expectations.

Mr Mould said the group’s strong performance together with the smooth integration of bwin.party presents exciting organic growth opportunities.”

GVC’s shares were up by over 4.9%.

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