The pound slid against the euro and the dollar on Thursday after the Bank of England announced that it was raising interest rates for the first time in over a decade but provided little guidance on when the next increase might be.
Immediately after the announcement, the pound was trading around 0.4 per cent lower against the euro at around €1.1347 and around 0.2 per cent lower against the dollar at $1.3221.
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.
The minutes of the MPC meeting cited signs of a pick-up in “domestic inflationary pressures” and “persistent weakness in productivity growth” as the reasons for the move.
But the Bank also said its forecasts are based on the assumption of a “smooth adjustment” of the UK economy to Brexit, 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 European Union.
This implies that if the economy shows further signs of weakness, any further rate hikes will be delayed.
Some analysts even said that Thursday's hike was premature, considering the uncertainty around 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.
Kathleen Brooks, research director at City Index, said that 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 that 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.”
