Sterling Surges After BOE's Carney Signals Rate Hike--2nd Update

By Dow Jones Business News, 
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By Josie Cox and Tommy Stubbington

Sterling surged and U.K. stocks sank Friday, after Britain's central bank gave the clearest signal yet it is inching closer to ending five years of record-low interest rates.

The British pound rallied to a 19-month high of GBP0.7974 to the euro, and a more than one-month high of $1.6991 against the U.S. dollar.

In an annual address held in the center of London's financial district, Bank of England Gov. Mark Carney said Thursday that interest rates in the U.K. could rise sooner than investors expect, citing a recent economic growth spurt.

"We and most analysts had come in expecting a repetition of recent dovish comments," said Steve Englander, a currency strategist at Citigroup, adding that he now remains positive on sterling and expects to see more gains against the euro.

Investors had largely been betting the BOE will begin raising its benchmark interest rate from an all-time low of 0.5% early next year, perhaps in February.

Mr. Carney's remarks, however, are likely to make investors reassess. Some economists already expect the BOE will begin raising rates late in 2014.

"Given that the markets were already mostly priced for a first quarter of 2015 rate increase, the likely consequence of [his comments] is that expectations of a fourth-quarter 2014 hike will now increase notably," said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ. He said that a November rate hike now seems the most plausible scenario.

Mr. Carney pointed to early signs of a housing bubble and said that real estate posed "the greatest risk" to the domestic economy, heaping pressure on U.K. housebuilders' stocks.

Shares in Barratt Developments, British Land, and Land Securities all dropped.

Wider U.K. markets also suffered declines, with the blue chip FTSE 100 index closing 1.0% lower.

Elsewhere Friday, energy prices continued to climb as Iraq edged close to all-out sectarian conflict. Kurdish forces took control of a provincial capital in the oil-rich north on Thursday and Sunni militants threatened to march on two cities revered by Shiite Muslims and the capital.

Brent crude was up 0.2% at $113.20 a barrel. On Thursday, it saw its largest one-day percentage gain since March 3, and Michael Lewis, head of commodity research at Deutsche Bank, said that he expects the latest events in Iraq "will sustain strong fundamentals" for Brent crude.

That strength boosted oil company shares, with Royal Dutch Shell PLC and Total SA climbing.

More broadly though, the escalating tensions in the Middle East had a fairly muted impact on equity markets. The pan-European Stoxx Europe 600 index fell 0.2%. Germany's DAX shed 0.3% while France's CAC-40 declined 0.2%.

Friday was a relatively quiet day in terms of economic data. Out of the U.K., figures showed that construction output rose in April for the first time in three months, boosted by new housing work and repairs. Elsewhere, figures showed that the euro zone's trade surplus widened in April compared with the same month a year earlier as imports fell more rapidly than exports.

Figures released by the European Union's statistics agency also showed that as tensions between the 28-nation bloc and Russia rose in the wake of the latter's March takeover of Ukraine's Crimea peninsula, trade flows continued to fall rapidly.

Write to Josie Cox at josie.cox@wsj.com and Tommy Stubbington at tommy.stubbington@wsj.com


  (END) Dow Jones Newswires
  06-13-141221ET
  Copyright (c) 2014 Dow Jones & Company, Inc.


This article appears in: Energy , US Markets , Forex and Currencies , Economy

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