LONDON (Reuters) – The Bank of England raised UK interest rates to 3% on Thursday in its largest rate hike since 1989 and warned of a “very challenging outlook” for the economy.
Investors had fully priced in the possibility of a three-quarter point increase. Money markets showed traders now expect UK rates to peak at 4.6% by next September, compared to expectations of 4.8% just two days ago.
The pound initially tumbled after the decision, while London-listed stocks cut losses and UK bonds also regained some ground.
MARKET REACTION:
FOREX: Sterling fell as much as 1.7% against the dollar to a session low of $1.1197 and was last down 1.4%. Against the euro, it fell 0.74% to 86.80 pence.
STOCKS: The FTSE 100 was last down 0.4%, having traded 0.7% lower ahead of the decision, while the mid-cap FTSE 250 index dropped 0.85%. UK bank stocks fell 0.56%
BONDS: Yields on the two-year gilt were last up 4 basis points at 3.068%, compared with 3.064% before the BoE announced its decision.
DAVID OWEN, CHIEF ECONOMIST, SALTMARSH ECONOMICS, LONDON
“The move is as expected. We’re still looking over the next couple of years for rates to go to over 5%.
“What happens to the pace of quantitative tightening will be important.”
ANDREW ALDRIDGE, PARTNER AT DEEPBRIDGE CAPITAL, LONDON:
“Quelling rampant inflation and kickstarting a slowing economy left the Bank facing a difficult balancing act, with today’s interest rate hike to 3% hardly surprising in this context.
“Fiscal and monetary policy remains murky as we move towards year close, and this environment poses significant challenges for investors and financial advisers in the public markets.
“Turning to private markets and venture capital as an alternative investment can offer steady long-term growth opportunities, with unparalleled tax reliefs available via the Enterprise Investment Scheme.”
(Reporting by London Markets Team; Editing by Yoruk Bahceli and Catherine Evans)
