Pound plunges as Bank hikes interest rates

Nov 05, 2017, 01:52
Pound plunges as Bank hikes interest rates

Sterling fell 0.1 percent to $1.3040 on Friday, its lowest since October 6, extending losses from the previous session when the BoE decision sent the pound plummeting nearly 2 US cents in just three minutes.

Bank of England policymakers voted by a majority of 7-2 to raise rates by 25 basis points from a record-low 0.25 per cent after a regular gathering, mirroring policy tightening seen in the United States and eurozone.

The central bank said it expected Thursday's rate hike, the first in over a decade, would be followed by just two more quarter-point increases over the next three years. The decision is controversial because the only reason to raise interest rates is to prevent the economy from "overheating", slowing down consumption.

A number of banks and building societies have already announced they will be increasing their rates in line with the rise announced by the Bank of England today. Sterling dropped more than a cent against the two currencies to $1.3130 and €1.1280 respectively. 'Today's quarter point rate hike shouldn't raise eyebrows, and looks for now to be a one-off muscle flex by the Bank of England, rather than the start of an aggressive tightening, ' he said.

The Bank said in a statement: "The decision to leave the European Union is having a noticeable impact on the economic outlook".

In its latest housing market forecast Savills also predicts that the Bank of England base rate will reach 2.5% over the period and average mortgage rates reach 4% over the next five years. "And Brexit-related constraints on investment and labour 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".

That was in the days shortly before the financial crisis which, when it hit, saw interest rates cut and cut in efforts to get the economy growing again.

Business bodies said the rise was expected, but warned that companies could be hit if further increase came too soon.

But some economists have voiced fears over the timing of a rate hike, amid uncertainty caused by Brexit negotiations and a shaky consumer outlook as household finances are squeezed by rising inflation and paltry wage growth.

That weaker pound has driven up the costs of imported food, fuel and other goods.

Also, although it is well above the Government's 2% target, the current inflation rate of 3% is still well short of two previous spikes seen since the financial crisis of 2008.

Last month's services purchasing managers' index (PMI) produced a better-than-expected result, showing the sector picking up to 53.6 in September, easily above the 50 level that separates growth from contraction.

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