British Pound Tumbles on Dovish Rate Increase by Bank of England
- The Bank of England has raised UK Bank Rate to 0.5% from 0.25% as almost unanimously expected.
- However, the British Pound fell back in response to what was seen as a “dovish hike”, with any further increases likely to be gradual and limited.
Updated with Commentary
The British Pound pressed to fresh session lows against the Euro and US Dollar during BOE Governor Mark Carney's press conference, in which the dovish tones of the tightening decision were fleshed out.
Carney said that the rate hike decision was "straight forward" as inflation was unlikely to "return to goal" (+2% over the medium-term) "without hikes." With "domestic CPI pressures likely to build in [the] coming years," Carney noted that the "time has come" for the BOE to take its "foot off the accelerator." That was about it for the positivity, however.
Noting that "these are not normal times" for the UK economy given the uncertainty surrounding Brexit, Carney said that "Brexit-related constraints [are] adding to [the] drag on potential," calling Brexit "the biggest determinant for [the] economic outlook."
Accordingly, Carney called the policy move today only a "modest adjustment in interest rates" and that only two hikes are expected through 2020. Finally saying that the Brexit deal could mean a "recalibration of BOE policy," it was clear that Carney and the rest of the Monetary Policy Committee don't necessarily believe that this is the beginning of a rate hike cycle.
The Bank of England has doubled UK Bank Rate to 0.5% – the first increase for more than a decade – but the British Pound fell back sharply in response to what was seen as a “dovish hike”. The decision was almost unanimously expected, as were the bank’s decisions to leave its program of UK government bond buying at £435 billion and its corporate bond purchases at £10 billion.
However, the Pound was weakened by news that two of the nine members of the bank’s monetary policy committee voted against the increase, preferring to leave rates unchanged. Moreover, the bank said any further increases would be “at a gradual pace and to a limited extent”.
The economic outlook, it added, was “broadly similar to August” while “considerable risks remain”, including those connected with Brexit.
Meanwhile, the bank’s quarterly Inflation Report shows inflation in one year’s time at 2.37%, down from 2.58% in August, and its prediction for economic growth in 2017 at 1.6%, down from August’s 1.7%.
Bank of England Governor Mark Carney, at a press conference to explain the latest developments, 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 it to be larger than normal. Indeed, he added, inflation pressures are likely to build.
In the markets, the British Pound dropped steeply against the US Dollar and suffered its biggest daily loss against the Euro in three months. UK government bond yields fell sharply and London share prices jumped.
Chart: GBP/USD Five-Minute Timeframe (November 2, 2017)
--- Written by Martin Essex, MSTA, Analyst and Editor, and Christopher Vecchio, CFA, Senior Currency Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.