Sterling drops on ‘one and done’ UK rate hike

Sterling fell sharply yesterday after the Bank of England raised interest rates for the first time in more than a decade but said it sees only gradual rises ahead.

The Bank of England said its nine ratesetters voted 7-2 to increase its benchmark bank rate to 0.5% from 0.25%, but it expected only “very gradual” further increases would be needed: Two more 25-basis-point hikes over the next three years.

The pound initially spiked higher on the announcement of the hike but fell almost 2c in the three minutes that followed, as investors digested the statement accompanying the rate decision, focusing on the fact that it did not appear that this hike marked the start of a steady tightening cycle. The euro surged 1.75% to over 89.25p.

Fexco Corporate Payments head of dealing David Lamb, said that despite the 10-year wait that the hike “has proved an anti- climax for the pound”.

“Mark Carney’s press conference talked of any future rises being gradual and limited, but the markets’ conclusion has been more blunt — one and done.

So the net effect has been to deliver a beating for the pound, which is now losing the gains made as it soared on the pre-hike hype,” said Lamb.

The Bank of England did not repeat previous language about markets underestimating the extent of future rises, with Bank of England governor Mark Carney telling a news conference following the announcement that in “broad brush” terms, the central bank was on the same page as investors.

However, he noted inflation was still on course to exceed the bank’s 2% target in three years, a possible warning to investors not to be too relaxed.

The UK’s economy slowed sharply this year after the Brexit vote in 2016, raising questions about the wisdom of raising rates now among many economists.

However, Carney fears that leaving the EU will aggravate the UK’s already weak productivity growth and make the economy more prone to inflation. Carney said the Brexit talks were likely to be the biggest factor for the next Bank of England move on rates, either up or down.

“We’re going to be in exceptional circumstances for a period of time, certainly until there’s clear resolution of the future relationship [with the EU], and even then, maybe longer than that,” Carney told reporters.

He also said the sheer novelty of a first rate hike created some uncertainty about its impact on the economy, but there was no reason to expect this to be larger than normal.

The move meant the bank followed through on its signal in September that an increase was coming, going some way to help counteract Carney’s reputation, in the words of one MP, of being an “unreliable boyfriend” who did not follow through on previous guidance about higher rates.

Alan Wilson, income portfolio manager at State Street Global Advisors said that the Bank of England had effectively said the rate rise was “a one-and-done move” because it was aware of the “upcoming headwinds facing the UK”.

“Nonetheless, questions remain over today’s policy announcement. In our view, tightening monetary may be premature amid an uncertain growth backdrop and transitory inflation pressure.

Capital Economics said the bank could still tighten policy “more rapidly” if UK economic growth picks up.

n Reuters; Irish Examiner

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