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Why the Pound Just Hit a Post-Brexit High Against the Dollar

The British pound surged against the dollar Friday to its highest level since the country voted to leave the EU 15 months ago, as the Bank of England finally managed to convince financial markets it’s serious about raising interest rates for the first time since the financial crisis exploded 10 years ago.

The pound rose above $1.36 for the first time since the night of the Brexit referendum after Gertjan Vlieghe, widely seen as the most “dovish” of the Bank’s nine-member Monetary Policy Council, said that it could be “appropriate” to raise the bank’s key lending rates “as early as in the coming months.”

Read: Mario Draghi Isn’t the Man to Push the Dollar Off a Cliff

The MPC had said the same thing in its statement on Thursday, when it left its official rates unchanged by a 7-2 vote and gave much the same warning, saying that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to its target of 2%. Inflation has been running near 3% in recent months and the Bank expects it to top that level in October, mainly because the sharp fall in the pound since the referendum has increased the cost of imports, which retailers have largely passed on to consumers.

The pound had already risen more than 1.5% on the back of Thursday’s announcement. It would have risen more, had it not been for the fact that the markets have lost confidence in the BoE’s ‘forward guidance’ after failing to follow through on similar warnings in the past. As a result, Mark Carney, the Canadian ex-Goldman Sachs alum who is the Bank’s Governor, is now widely seen as the pound’s “unreliable boyfriend.”

Even now, some fear that the economy is too weak for interest rate rises, given the many uncertainties over the Brexit outlook. As in the U.S., wages continue to stagnate despite a jobless rate that suggests full employment.

Read: Britain’s Old Guard Tries to Rally the Faltering Brexit Troops

“Monetary tightening can often serve as a positive signal if it is a response to strong economic growth,” said Abi Oladimeji, chief investment officer at Thomas Miller Investment in London. “However, rate hikes by the BoE at this point would be counterproductive as it could undermine economic activity at a time when both consumer and business confidence are already flagging.”

Read: Germany Tells the ECB It’s Time to Start Raising Interest Rates

The trouble is, the BoE may not have a choice any more. With both the Federal Reserve and, more recently, the European Central Bank shifting to a tighter stance, both the dollar and the euro look like better bets, in terms of nominal returns, than the pound. Unless the BoE supports sterling with higher rates, the risk is that the pound’s slump translates into a permanent loss of purchasing power and living standards for most Brits.