Pound Crashes After Dovish Hike by BoE

The Bank of England hiked its main interest rate for the first time in a decade as was widely expected, but markets considered the hike to be a dovish one. The Great Britain pound crashed as a result, falling more than 1% against its most-traded peers.

The BoE increased its key interest rate from 0.25% to 0.5%, leaving the size of the asset purchase program unchanged at £435 billion. While it was considered a historical decision, in practice it was just a reversal of the cut made as a reaction to the Brexit. Two of the policy committee members voted for keeping the rate unchanged. What is more, the bank’s statement signaled that any further monetary tightening will be slow and gradual due to uncertainty associated with the Brexit:

All members agree that any future increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.

The seasonally adjusted IHS Markit/CIPS UK Construction Purchasing Managers’ Index, released ahead of the BoE announcement, climbed from 48.1 in September to 50.8 in October, moving above the neutral 50.0 level, thus signaling that the sector has returned to expansion. Analysts had expected the index to stay almost unchanged at 48.3. Yet the positive report was unable to stop the gradual decline of the pound before the BoE decision, and obviously it could not prevent the crash after the event.

GBP/USD dropped as much as 1.1% from 1.3248 to 1.3099 as of 14:07 GMT today. GBP/JPY also declined by 1.1% from 151.19 to 149.49. EUR/GBP climbed 1.4% from 0.8771 to 0.8890.

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