UK interest rates: Pound sterling drops sharply after Bank of England hike

Traders had seemingly price in the hike but pound tumbled after the BoE's decision was published

The pound was trading down 0.82 per cent against the dollar after the Bank of England’s monetary policy committee voted unanimously to hike the base rate from 0.5 per cent to 0.75 per cent.

Sterling had been trading down around 0.4 per cent earlier in the session, and appeared to reverse those losses in the immediate aftermath of the decision. However, the currency took another dip and fell to $1.3020 an hour after the Bank announced its decision.

The pound also dropped against the euro, tumbling by 0.34 per cent to €1.122.

Sterling’s decline coincided with the Bank’s press conference, during which governor Mark Carney said Threadneedle Street would continue to follow a strategy of “ongoing, limited and gradual tightening of monetary policy” in order to keep inflation within target. He added that this could lead to three further rate rises over the next three years.

“Despite the intentionally hawkish signals it appears that traders aren’t buying it, with a failure for sterling to gain on what is, on the face of it at least, a positive hawkish message, a potentially ominous warning sign for the currency going forward,” said David Cheetham, chief market analyst, at brokerage XTB.

“Looking ahead, the curve has barely budged on today’s news with a further hike before year-end still seen as highly unlikely and and an additional increase not priced in until September 2019.”

Jordan Hiscott, Chief Trader at ayondo markets, said it was notable that sterling had fallen “despite the fact the market had clearly priced in the expectation of a 0.25 per cent rate hike”.

“A couple of things stand out for me. Firstly, the recent economic data is not consistent enough to warrant a rate increase and future near term increases. Brexit and the fractious nature of negotiations will likely also affect this determining of the next move for the MPC,” he said.

“Secondly, the last time the MPC voted unanimously to increase rates was May 2007, and that didn’t turn out too well then.”

Business groups were critical of the central bank’s decision to hike, with the the IoD’s senior economist, Tej Parikh, saying: “The rise threatens to dampen consumer and business confidence at an already fragile time.”