Pound plunges as Bank hikes interest rates

Friday, 03 Nov, 2017

The Bank of Canada has increased its benchmark rate twice this year as the Canadian economy started the year as the strongest in the G7.

The bank's Monetary Policy Committee (MPC) voted for the rise at a majority of 7-2.

Governor Mark Carney said the central bank was hoping to ensure that, regardless of how Brexit negotiations turn out, the financial system remains secure and prices stay under control.

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

"The reason why we've got additional rate increases in our forecast this time is because of the lower productivity profile", Amit Kara, head of United Kingdom macroeconomic forecasting at Niesr, told reporters.

Economists saw this as "dovish" in tone.

"What matters to us is what people think is going to happen, and how they react to that", he said.

The weaker pound boosted dollar earners on the FTSE 100, which closed just one point shy of its record high at 7555.

It's worth going back to the late summer and remembering the United Kingdom economic and financial backdrop that led to the Bank's surprise signal on September 14 that rates would soon go up.

This is the first rate hike from Carney.

They were then cut again last summer in the aftermath of the Brexit vote, to 0.25%.

But it has stressed further rises will be "very gradual", while the timing and degree of further hikes are highly dependent on the economy and Brexit impact.

The rate increase is a sign, however, that rising prices outweigh other concerns inside the Bank of England.

UK Finance, the trade body for Britain's lenders, says there were 9.2 million outstanding mortgage loans outstanding in June this year.

In early 2017, Lloyds Bank cut its Club Lloyds credit interest rate from 4% to 2%, TSB reduced a 5% rate on its Classic Plus account to 3% and Halifax dropped its £5 monthly reward payment on its Reward current account to £3.

It calculated that many households who now have a fixed-rate mortgage will actually see a reduction in their payments when they remortgage because consumer borrowing costs have come down in recent years.

Nearly all economists polled by Reuters expect the BoE to raise base rates to the 0.5 percent they stood at from March 2009 until August a year ago, when they were halved to 0.25 percent after Britons voted to leave the European Union.

It also said Brexit-related constraints on investment and the labor supply appear to be "reinforcing the marked slowdown that has been increasingly evident in recent years in the rate at which the economy can grow without generating inflationary pressures".

The Bank believes the United Kingdom economy will grow by 1.6% in 2017 and 2018, with growth edging up to just 1.7% by the start of the next decade.