Pound Slumps After Bank of England Raises Rates

(Bloomberg) -- The pound slumped after the Bank of England's hawkish rhetoric failed to convince markets of a brighter economic outlook.

In a surprisingly unanimous decision, the BOE's Monetary Policy Committee raised the benchmark interest rate by 25 basis points to 0.75 percent and flagged further increases. Still, sterling fell to its lowest since July 20 as the central bank chief signaled the pace of further hikes would be gradual and markets questioned the rationale for tighter policy when the U.K.'s exit from the European Union is still mired in uncertainty.

“It is very difficult for the BOE to convince the market that it may hike rates again when everyone knows there hasn't yet been a Brexit deal,” said Jane Foley, a senior currency strategist with Rabobank International. “It seems unlikely that the MPC will be willing to hike again in the coming months. Sterling remains very vulnerable to political uncertainty.”

Sterling failed to shake off its blues as money markets continued to price in the next rate increase as late as September 2019 and policy makers said they saw inflation remaining contained within the 2 percent target through 2021.

The pound slid as much as 0.9 percent to $1.3016. While strategists in the Bloomberg currency survey still see the U.K. currency ending the year higher at $1.3400, their median forecast has fallen from $1.4300 call as recently as April. The yield on benchmark 10-year gilts was two basis points lower at 1.36 percent.

“Some fairly optimistic assessments in there -- but this is all with rose-tinted glasses of a smooth Brexit adjustment,” said Viraj Patel, strategist at ING Groep NV. “That is currently not a view that everyone in the market shares -- so expect limited follow-through. The short-term political troubles for the pound remain.”

To contact the reporters on this story: Anooja Debnath in London at adebnath@bloomberg.net;John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins

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