Brett Thomas, Head of Dealing at Godi Financial, provides comment on today’s interest rate rise and the impact on Sterling.
This afternoon’s Bank of England monetary policy meeting was arguably one of the most eagerly anticipated since the Central Bank opted to cut UK interest rates to an all-time low of 0.25% following the UK’s EU Referendum back in 2016.
Following the recent rhetoric from a number of MPC members, most notably the Bank of England’s Governor Mark Carney himself, economists had widely expected the BOE to hike rates by 25 basis points today, in an attempt to curb the current soaring levels of inflation. And that is exactly what came to pass, with a 7-2 vote in favour of the 25 basis point hike, lifting UK interest rates back to 0.50%. This was the first interest rate rise in a decade.
Sterling had been buoyant in the lead up to today’s meeting in anticipation of a rate hike, with the Pound peaking at 1.3320 and 1.1448 versus the US Dollar and Euro respectively earlier this morning. Despite interest rates being raised as expected, which would typically lead to the strengthening of the domestic currency (i.e. The Pound), Sterling was in fact hammered in FX space plummeting by around a cent against both the Euro and US Dollar in a matter of seconds.
The overriding reason for the surprise fall in the Pound was the perceived ‘dovish’ tone of the BOE’s accompanying rate statement, with the Central Bank suggesting any future hikes would be “at a gradual pace and to a limited extent”. There had been expectations coming into this meeting that the next hike could come as soon as March next year, however the BOE appears to have firmly pushed back those expectations today. The BOE also warned that Brexit was having a “noticeable impact on the economic outlook” of the UK, another reason to suspect they will be particularly cautious going forward.
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