LONDON: Sterling fell sharply on Thursday (Nov 3) as the Bank of England (BoE) raised interest rates by 75 basis points, a day after the Federal Reserve hiked borrowing costs by the same amount.
The BoE’s rate hike was its biggest in three decades and took the main rate to 3 per cent.
It came a day after the Fed hiked by 75 basis points and signalled that rates were likely to rise more than anticipated to crush inflation, driving US bond yields and the dollar sharply higher.
In contrast, the BoE’s monetary policy committee (MPC) said borrowing costs were unlikely to rise as high as markets expected before its meeting, in unusually specific guidance.
Sterling fell sharply after the BoE decision, dropping as much as 2.1 per cent to US$1.1158 before recouping some losses.
The euro rallied against the pound, rising 0.91 per cent to 86.95 pence.
“What caught my eye is that while some central banks are saying they don’t know how high rates will go, the BoE is saying the peak is lower than what the market is pricing,” said Jan von Gerich, chief economist at Nordea. “Sterling could face some pressure against the dollar at least.”
The BoE was widely expected to raise borrowing costs by 75 bps on Thursday, although some analysts thought a 50 bps increase was a possibility.
Two BoE policymakers, Silvana Tenreyro and Swati Dhingra, voted for smaller increases of a quarter and half a percentage point respectively, reflecting concerns about the economy.
In a statement, the MPC said: “Further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.”
Markets expected the BoE to hike rates to 5.2 per cent when the central bank finalised its forecasts.
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