Pound plunges as Bank hikes interest rates

Caitlin Morrison
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The Bank of England raised rates today (Source: Getty)

The pound dropped dramatically by almost one per cent against the dollar in the moments after the Bank of England raised the base rate for the first time in 10 years.

Sterling fell 0.91 per cent against the dollar, and 1.32 per cent against the euro after the central bank's decision was announced.

Seven members of the rate-setting monetary policy committee (MPC), including governor Mark Carney, voted in favour of a 0.25 percentage point hike in bank rate, to 0.5 per cent.

The decision was widely expected, and was believed to be priced in by markets, but many traders were surprised at the pound's nosedive.

This is how the experts explained it:

Waking up the pound bears

Lukman Otunuga, research analyst at FXTM, noted that "under normal circumstances, such an auspicious event would have immediately elevated sterling and boosted sentiment towards the UK economy".

However, he said the Bank's dovish hike - Threadneedle Street emphasised today that future rate increases will come at a gradual pace - had woken the "pound bears".

"There is a suspicion that this could be a "one-and-done" move, especially when considering how the unsavory combination of Brexit uncertainty and weakening economic growth continues to weigh heavily on sentiment," Otunuga added.

Violent reaction

Connor Campbell, financial analyst at Spreadex, also said the "pretty damn violent" currency movement was down to the Bank's claims that any future increases would be at a 'gradual pace and to a limited extent'.

"This stands in contrast to September's statement, which suggested rates would rise at a faster pace than the market expected," Campbell added.

"The central bank didn't stop there, piling on the dovishness by stating that 'uncertainties associated with Brexit are weighing on domestic activity', leaving the UK economy to struggle while global growth rises 'significantly'."

Similarly, analysts at ING attributed the pound’s "knee-jerk move lower to markets pushing back their expectations for additional BoE rate hikes", although they noted the overall level of tightening priced in has "returned back to where it had been on average over October".

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