The pound-euro exchange rate has shot up to 1.133, levels not seen since July, while sterling is at 1.353 against the US dollar, the highest level since Brexit, amid expectations interest rates could rise as soon as November 2017.
Britain’s currency tends to strengthen when the likelihood of the Bank of England raising interest rates rises.
The Monetary Policy Committee (MPC) has this week warned the base rate will soon rise from 0.25 per cent, if the economy continues along the same path.
MPC member Gertjan Vlieghe, has now dropped further hints that a hike is coming soon.
In a speech he today said: “If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.”
It comes after inflation shot up to 2.9 per cent in August – raising interest rates is one way for Bank of England to help keep the cost of living in check.
In a statement the MPC yesterday said: “Some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.”
Another MPC member Michael Saunders recently warned that if interest rates don’t rise soon, British families could be hit with steeper and more painful increases later down the line.
Connor Campbell, financial analyst at Spreadex.com, said: “A hawkish statement from the Bank of England allowed sterling to continue its super-charged September.
“As expected, the central bank voted to keep rates unchanged this month, with Ian McCafferty and Michael Saunders the only voices of dissention.
“However, the statement that followed the vote signalled a shift in position at the Monetary Policy Committee.
“According to the MPC’s comments, if the economy follows a path ‘broadly consistent’ with the figures outlined in August’s Inflation Report then ‘monetary policy could need to be tightened by a somewhat greater extent’ than current market expectations.”
All eyes will now be on MPC members in the coming months, as well as economy data.
Craig Erlam, senior market analyst at Oanda, said: “It seems policy makers are not willing to wait and see whether the above-target inflation is in fact transitory or if it has become more ingrained but I guess the actions taken last year allow them the opportunity to act while remaining as accommodative as they were prior to the Brexit vote.
“The question now is how far can the pound go.
“The next test against the dollar is 1.35, a break of which would be very surprising as it would signal a move back towards the kind of levels we were seeing prior to the Brexit vote.
“Against the euro, we’ve broken back below 0.90 and currently trade below 0.89 and so the next test below could come around 0.8850 and 0.88 below that.”