Sterling rose in European trade against a basket of major rivals, extending gains against the yen for the seventh straight session and scaling a nine-year peak amid renewed concerns about the widening UK-Japan interest rate gap.

Even as inflationary pressures retreat on Bank of England’s policymakers, there remains doubts about the prospects of cutting UK interest rates in June.

Conversely, the Bank of Japan raised mainline interest rates for the first time since 2007, while still maintaining accommodative policy tools for the time being.

GBP/JPY

GBP/USD rose 0.5% to 192.85, the highest since August 2015, with a session-low at 191.77, after rising 1.05% yesterday, the sixth profit in a row, and the largest since January 3 following bearish remarks by the BOJ following its policy decisions.

Bank of England

Even as inflation plumbs three-year lows in February, it’s still far from the 2% official target.
Thus it’s likely that the Bank of England will be slower in cutting interest rates this years compared to the US and Europe.

The BOJ

In a historic decision, the Bank of Japan finally exited eight years of negative rates, and raised them by 20 basis points to below 0.1%, the first such increase since 2007.

The BOJ asserted that any upcoming interest rate hike will be modest, and it expects to “maintain current accommodative conditions for the time being”.

BOJ Governor Kazuo Ueda said he doesn’t expect interest rates on deposits or borrowing to rise sharply next year.

Interest Rate Gap

The current UK-Japan interest rate gap stands at 515 basis points in favor of the UK, and is expected to remain thus for a long duration this year, in turn boosting the pound.