Strong U.K. PMI revives talk of Bank of England rate increase

On Monday a surprising surge in U.K. manufacturing growth lifted the British currency, and also renewed the talk of the timing of the Bank of England’s first interest-rate increase since the financial crisis.

U.K. government bonds fell as forward contracts based on the sterling overnight index average, or Sonia, signaled that a full 25 basis-point rise to the BOE’s official bank rate will come in November 2016. As lately as October 30 it indicated it wouldn’t take place until after December 2016.

This week officials meet in London to discuss new forecasts for growth and inflation, and speculation increases that Governor Mark Carney may take a more hawkish tone.

Derek Halpenny, the London-based head of European markets research at Bank of Tokyo-Mitsubishi, noted that if there is more upbeat data as today, there will be further pushing for tightening:

“There’s a decent chance that Carney’s becoming a little uncomfortable with the extent of pushing back of yield expectations. Softening up the market in that regard on Thursday looks very possible, so all of that gives the pound a lift.”

He estimated that by the year-end, the pound will strengthen through 69 pence per euro and to 65.50 pence by the third quarter 2016, a level last seen in January 2007.

A trade-weighted measure of sterling jumped for the first time in three months in October amid mounting expectations that the U.S. Federal Reserve will increase U.S. rates by the end of this year. The Fed rate hike is seen by many as a predecessor of a liftoff by the BOE, whose key rate has been at a record-low 0.5 percent since March 2009.

According to futures contracts, chances that the Fed will hike in December have climbed to 50 percent.

U.K. economic data coming in better than estimated is driving the case for higher rates.

Earlier Monday, Markit Economics reported that manufacturing growth unexpectedly accelerated to the fastest in 16 months in October, with its index rising to 55.5 from a revised 51.8 in September, beating analysts' expectations. The gauge of new orders climbed to the highest level in 15 months, with a measure of export demand also showing better results. A reading above 50 indicates expansion.