UK interest rates: Pound sterling falls after Bank of England raises rates for first time in a decade

The pound fell sharply against the euro and the dollar on Thursday after the Bank of England announced it was raising interest rates for the first time in over a decade.

Sterling fell 1.7 per cent against the euro to €1.1204, and about 1.36 per cent lower against the dollar to $1.3063.

Generally, higher interest rates encourage saving by raising the incentive to put money in the bank. They also incentivise foreign investors to transfer their money to UK banks where it will earn more interest.

But Thursday’s move by the Bank had been widely expected and many analysts said it had already been “baked in” to the trading level of the pound. 

The minutes of the Monetary Policy Committee meeting cited signs of a pick-up in “domestic inflationary pressures” and “persistent weakness in productivity growth” as the reasons for the move, but they also said that forecasts are based on the assumption of a “smooth adjustment” of the economy to Brexit.

That’s something that has been thrown into increasing doubt by the failure of the Government to make any substantive progress in its Article 50 divorce negotiations with the EU.

This implies that if the economy shows further signs of weakness, any subsequent rate hikes could be delayed.

Some analysts even said that Thursday’s hike was premature, considering the uncertainty surrounding the economy. 

“The BoE’s decision to raise its base rate today will likely prove to be a mistake and is unlikely to mark the beginning of a sustained rate rising cycle,” said Nicholas Brooks, head of research and investment strategy at Intermediate Capital Group.

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Kathleen Brooks, research director at City Index, said the latest move was likely to be “one and done” rather than the start of a rate hiking cycle.

Ian Kernohan, economist at Royal London Asset Management, said his base case is that the Monetary Policy Committee will raise rates “slowly” over the next two years, and only “assuming a Brexit deal is visible by mid-2018, unemployment remains low and global growth holds up”.

“With inflation set to fall next year as the impact of sterling devaluation wanes, the MPC will stop hiking if there are clear signs that the economy is slowing,” he added.

The FTSE 100 index of the UK’s biggest public companies finished the day up 0.9 per cent at 7,555.32. 

Due to a majority of the companies in the index having a large share of revenues in foreign currency, it tends to rise when the pound falls.