Surprised, stunned, or suspicious? Bank of England’s interest rate hike slaps Sterling

Expert opinion piece

The Bank of England (BoE) has raised interest rates for the first time since July 2007 to 0.5 per cent, forecasting two more rate hikes over the next three years.

Two of the Monetary Policy Committee (MPC) were in favour of retaining the existing rates, but were outvoted by the rest of the Monetary Policy Committee. This speaks volumes about the perception of the strength of the UK economy and has had a dramatic effect on the Pound, demonstrating the uncertainty and volatility of currency markets in the current economic climate.

David Johnson, founding director of Halo Financial, said: “The Bank of England’s 25 basis point interest rate hike was so widely expected that the announcements were something of an anti-climax. What wasn’t expected was the statement that the BoE saw no more than two further 0.25 per cent hikes in the next three years. That rather dovish view saw Sterling, which had gained half a cent against the Euro in the seconds after the announcement, dive by a full cent in the following 30 seconds.

“Such is the nervousness in the foreign exchange markets. Surely traders, when they sit back and review the BoE’s decision and announcement, will realise this was not so unexpected, but it is rare for a central bank to give such long term guidance – and that has battered the wind from traders’ sails in the short term. A slower but more sustainable Sterling recovery may well be the next move.”

We expect continued volatility as markets digest the situation and as other economic events unfold in the US and Europe.

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