Pound rallies to two-week high as gilts sell-off

The pound appreciated against all of its major peers and bonds fell after Bank of England policy maker Kristin Forbes voted for an interest-rate increase, a dissent that caught some in the market by surprise.

Sterling climbed to a two-week high and gilts sold off across the curve as the central bank kept the benchmark rate at a record low in an 8-1 vote.

Investors are now pricing an 80 per cent chance policy makers will raise rates by September 2018, compared with about 60 per cent yesterday, money-market pricing shows.

Forbes supported a rate increase to 0.5 per cent, and some of those in the majority said it wouldn’t take much more strength in inflation or growth for them to also shift their view.

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“The markets were remarkably relaxed going into the decision, and in a sense some may have been caught a little offside by the fact that it isn’t uniformity, which has been the general view of late,” said Jeremy Stretch, head of Group-of-10 foreign-exchange strategy at Canadian Imperial Bank of Commerce.

“There was always the risk on Forbes -- I would also note to fact that she has about two more MPC meetings before she departs.”

Bloomberg