Financial Market

Sterling edges up after BoE’s tentative rate hike

A shop cash register is seen with both Sterling and Euro currency in the till at the border town of Pettigo, Ireland October 14, 2016. REUTERS/Clodagh Kilcoyne

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LONDON, June 16 – Sterling rose on slightly on Thursday, recouping losses earlier in the day after the Bank of England (BoE) raised interest rates by 25 basis points and confounded forecasts by some market participants of a bigger hike to fight soaring inflation.

The pound was last up 0.29% on the day at $1.2212 against the dollar amid volatile markets, compared to $1.2165 just before the BoE decision. Against the euro, sterling rose 0.59% to 85.34 pence .

Expectations the BoE would hike by more than 25 basis points had grown after the U.S. Federal Reserve on Wednesday delivered its biggest hike since 1994 and the Swiss National Bank then shocked markets on Thursday with a large surprise hike of its own.

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The BoE instead opted for a smaller increase, although it was the central bank’s fifth consecutive hike as it strives to fight rising prices without hurting Britain’s embattled economy.

Analysts and investors said the tentative hike should support the pound, albeit longer term pressures remain on the currency versus the buoyant dollar.

“It’s the only real lever the Bank has available to stall the pound’s great collapse towards dollar parity, something that becomes more likely the wider the gap that appears between the two economies,” said James Bentley, director of trading education platform Financial Markets Online.

The benchmark FTSE index (.FTSE) index fell 2.58%, while 10-year UK government bond yields rose to 2.6%. GB10YT=RR

Britain’s growth prospects are seen among the weakest for rich countries in 2023, and there is uncertainty over how fast the BoE can tighten policy this year to tame inflation without further dampening economic activity.

Sterling has weakened around 11% against a robust dollar since the start of the year given the grim outlook for the economy and political instability in Britain.

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Reporting by Lawrence White
Additional reporting by Joice Alves Editing by Carmel Crimmins, Mark Potter and Mark Heinrich

Our Standards: The Thomson Reuters Trust Principles.

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