Sterling drop after United Kingdom rate hike questions point of the exercise: McGeever

POUND GRAPH

LIVE The current exchange rate is €1.13507 to the pound

On Thursday, the Bank of England increased the official bank rate from 0.25% to 0.5% on Thursday in response to rising inflation.

Base rate rises have a magnified effect upon landlords, who nearly certainly have an interest-only mortgage, unlike conventional buyers who are forced to have repayment mortgages.

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.

However, they appear more willing to pass the rate rise on to borrowers. "But the big news is that the Bank is no longer telling markets that their rate expectations are too low", says James Smith, a developed markets economist at ING Group putting his finger on what he believes triggered the bearish reaction in Sterling.

"It's no surprise that the Bank of England has taken the historic decision to hike rates for the first time since the financial crisis". This could suggest market pricing was either on-the-money or overly optimistic.

This doesn't mark the start of a rate-hike cycle, like the one the US. "But that relies on the data, in particular on wage growth, improving and, more importantly, Brexit going smoothly", Smith adds.


"For a whole generation of United Kingdom households now entering adulthood, it's a small but important reminder that interest rates can move in an upward direction, even if only slowly", Aberdeen Standard Investments economist Lucy O'Carroll commented.

"The rate's rise will be gradual and modest and, in my opinion, will not affect the prime central market, which is a market unto itself", Ms. Fatemi said. In September, inflation reached 3%, the highest in five years.

"The combination of inflation stabilising, real income growth improving and the likelihood of a transition deal leave us unconvinced that the rates market is accurately priced, " warns Derek Halpenny, European head of global markets research at MUFG.

"The Committee will monitor closely... the impact of today's increase in Bank Rate, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the two percent target", the minutes added.

"We estimate one in 10 of our clients with a mortgage will end up with a deficit budget, and some households will need support to adjust", said Mike O'Connor.

"Admittedly, it did not suggest that this is merely a "one and done", says Paul Hollingsworth, senior United Kingdom economist at Capital Economics. A whole generation of home owners and businesses will have never before experienced a rate rise, although in reality it's only returning to the level of a year ago so the short term impact shouldn't be overly harsh for most people.

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