Pound Sterling surges on Bank of England suggestion

Adam Gault | Digital Vision | Getty Images

Overall, the Pound won the day and USD/GBP dropped.

"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", said Oanda analyst Craig Erlam. On Thursday afternoon the pair tumbled to its lowest level in over a year, 0.7483.

The pound advanced to more than a 5-week high of 1.2708 against the Swiss franc, from an early low of 1.2560.

"Recent developments suggest that remaining spare capacity in the economy is being absorbed a little more rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2 per cent target over the next three years", it said.

Nevertheless, the MPC signalled that it was gearing up for a rate increase, possibly later this year.

"However, given downside risks to global and United Kingdom growth as well as to inflation as the impact of sterling depreciation fades over the next few months, I think this hawkish shift will not last".

Mr McCann said the central bank's rhetoric about rate rises is to give it flexibility in future.

Bond yields rose - but not so much as to reflect the possibility of the beginning of a cycle of rate hikes. Considering we have finally seen their inflation rate beat expectation, their hike cycle may well on track to continue.

This news would typically cause the US Dollar to advance, but the "Greenback" simply wasn't able to hold its ground against a surging Pound.

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This post will be updated after the Bank of England's decision is announced.

The BoE will issue a policy statement today.

The interest rate remained at 0.25% and quantitative easing (QE) was left untouched.

As we have mentioned in the past, we think that a continued increase in inflation towards around the 3% level should encourage more members of the Bank of England's monetary policy committee to begin voting for an immediate interest rate hike.

Ian McCafferty and Michael Saunders maintained their call for a quarter point rate hike at the meeting.

The biggest takeaway from the decision for markets however, were the contents of the bank's latest meeting minutes.

Such a move, which would mark the first interest rate increase in the United Kingdom in nearly a decade, is likely "over the coming months", the panel said, if the economy performs broadly in line with officials' expectations. Hence fiscal policy will loosen and monetary policy will tighten to maintain macro-balance.

The MPC added that since the August Report, "the relatively limited news on activity points, if anything, to a slightly stronger picture than anticipated".

'Policymakers have continually warned rates may have to rise sooner than the market expects, while at the same time doggedly sitting on their hands'.

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