The headquarters of the Riksbank, Sweden's central bank, stand in Stockholm, Sweden, on Thursday, Nov. 29, 2012. Sweden's Riksbank is unlikely to back proposals for a cap on banks' foreign borrowing even after the government and regulator warned that the industry is too reliant on international funding markets. Photographer: Casper Hedberg/Bloomberg
The headquarters of the Riksbank, Sweden's central bank, in Stockholm

Sterling hit a six-week high against the dollar after markets focused on hawkish aspects of the Bank of England’s quarterly inflation report.

Governor Mark Carney said the headlines highlighting low inflation masked stronger underlying dynamics in the UK and forecast a return to the Bank’s 2 per cent inflation target within two years

Markets had got ahead of themselves in expecting no interest rate rises until late 2016, the Bank said, deepening speculation that UK rates could first rise from their historic, crisis-era low of 0.5 per cent early next year.

Markets reacted strongly, with falling gilt prices forcing yields higher, while sterling hit a session high of $1.5391 against the dollar. By late afternoon in London the pound was 1 per cent higher at $1.5381, and stood 0.4 per cent higher against the euro at £0.7412.

Rob Wood, chief UK economist at Berenberg said the BoE “gave markets a qualified but hawkish nudge”.

He added: “Markets had gone too far in pushing back the likely timing of the first BoE rate hike. Increases in borrowing costs are not imminent . . . [but] a hike by around this time next year looks about right”.

Fabrice Montagne at Barclays Economic Research said the BoE “now seems much more confident about its outlook”, adding: “The lower oil price boosts domestic demand without relying on a sharp drop in saving rates.”

Central bank action drove Sweden’s krona to a six-year low against the dollar after the Riksbank became the latest monetary policy authority to adopt quantitative easing stimulus measures and take interest rates negative.

Following the Riksbank action, as many as 9.6835 krona were required to buy a single euro. In late trade, the krona was down 1.3 per cent at SKr9.6240 against the euro and 1 per cent lower versus the dollar at SKr8.4638, its weakest level against the world’s reserve currency since 2009.

Sweden’s action comes after a flurry of activity sparked by the European Central Bank’s adoption of quantitative easing stimulus measures.

Analysts at SEB predicted further action. “The market should price a significant probability that the Riksbank will lower the repo rate to minus 0.25 per cent in either March or April . . . The announcement today should be marginally negative for the krona in the short term. However, we don’t see scope for a Swedish QE programme to match the size of the ECB’s.”

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