Sterling FALLS ahead of BOE interest rate meeting

GBP EUR Oct29

The Bank estimates that nearly two million mortgage holders have not experienced an interest rate rise since taking out a mortgage.

Sterling steadied on Thursday, consolidating some chunky gains this week, especially against the euro, before a historic Bank of England policy decision where it is widely expected to raise interest rates for the first time in almost a decade. The Bank of Canada has increased its benchmark rate twice this year as the Canadian economy started the year as the strongest in the G7.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulates spending.

Mr Carney said inflation was unlikely to return to 2% without raising rates, because the economy was growing at levels "above its speed limit".

Although the rise may not have a major impact on commercial real estate, it will hit variable-rate mortgage owners across the United Kingdom and will likely be the first time many have experienced an increase in their mortgage payments.

But the Bank also said its forecasts are based on the assumption of a "smooth adjustment" of the United Kingdom economy to Brexit, something that has been thrown into increasing doubt by the failure of the Government to make any substantive progress in its Article 50 divorce negotiations with the European Union. However, he specified that the independent variable for that policy will be Brexit negotiations. "The Bank of England will likely see October's [PMIs] as supportive to the decision to raise interest rates", said Howard Archer, chief economic adviser to the EY Item Club consultancy.

Lower interest rates can also affect consumers' and firms' cash-flow - a fall in interest rates reduces the income from savings and the interest payments due on loans. Some lenders may well be prepared to absorb rate increases into their margins, as they are still chasing business.

"The MPC now judges it appropriate to tighten modestly the stance of monetary policy in order to return inflation sustainably to target", the meeting minutes said.

Costs increased rapidly, though at the slowest rate in just over a year, possibly tallying with the BoE's view that the inflationary effect of last year's more than 10 percent fall in the value of the pound is starting to fade.

Policymakers are now becoming less tolerant of surging inflation, given that the economy has performed better than feared since the European Union referendum.

In its Quarterly Inflation Report, released with the announcement on rates, the Bank estimated inflation was likely to peak this month at 3.2%.

The Bank is tasked by the Government with keeping CPI at 2%, but has been tolerating higher inflation amid uncertainty caused by the Brexit vote to prevent shocks to the economy.

This suggests the economy is stable and no longer in need of the emergency boost delivered by the Bank after last year's Brexit vote.

Sterling is set to remain volatile due to Brexit uncertainty.

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