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Governor Mark Carney tarnished his reputation as an ‘unreliable boyfriend’ by delivering the rate hike that was so long expected, but with the central bank forecasting tepid economic growth and cautioning that future rate adjustments would take place ‘at a gradual pace and to a limited extent’ the pound dropped dramatically in the wake of the decision.
- MPC votes 7-2 for an immediate rate hike
- Minutes state that rates will need to rise by a further 0.5% over the next two years
- Rate hikes expected to bring inflation ‘broadly under control’ in the medium term
- GBP drops by over 1% against EUR, USD, AUD, NZD & CAD
How will the rate adjustment impact your business?
The BoE hasn’t increased borrowing costs for more than ten years.
While this move only takes interest rates back to where they were before they were slashed to historic lows in wake of the UK’s decision to break from the European Union, inflation is at multi-year highs, wage growth is tepid and the post-Brexit landscape remains uncertain.
In such an environment, this rate increase only adds to the negative headwinds facing UK businesses.
The pound has also been rattled by the news, and its decline from recent multi-month highs against the euro, Australian, New Zealand and Canadian dollars could complicate matters for businesses with foreign exchange requirements.
Phil McHugh, Senior Market Analyst with Currencies Direct, comments on the shifts we’ve seen in the currency market;
“Rates have been hiked from 0.25% to 0.5%, the first UK rate hike in over a decade and the pound has fallen thanks to lack of momentum for further hikes due to inflation pressures easing over time.
Mark Carney has reiterated that the pace of rate hikes will be gradual and limited. Although rates are higher, there will be little appetite to buy into the pound as the Bank is not on a hiking cycle and we are facing ongoing Brexit uncertainties. This will be disappointing for importers who would benefit from a stronger pound and for whom the immediate 1% drop in Sterling’s value after the announcement will feel counter-intuitive.
The hike reverses the emergency rate cut post the Brexit vote - so if Brexit does hit hard it offers them some room to manoeuvre. We are not likely to see a further hike for some time leading to any pound momentum hitting a wall.”
When speaking of how the decision will effect SMEs, Phil noted; “Many new UK SME’s have enjoyed a low interest rate environment and will not have experienced the impact of a rise in rates. The negative consequences of a cocktail of higher borrowing costs, higher wage pressures from employees and lower consumer demand will especially hit the growing SME sector.
The main impact of a hike is a likely reduction in confidence for consumers and firms already rattled by ongoing Brexit uncertainties and an erosion of growth that is already tepid. Some have argued the economy is still too fragile to cope with increased borrowing costs.”
If you’re concerned about what the policy change could mean for the long-term exchange rate outlook and want to discuss your hedging options, our business team are here to help.
Contact us today on +44 (0) 20 7847 9477 or email [email protected]