Bank of England Hikes Benchmark Rate 75 Basis Points, Biggest Rate Rise Since 1989

The British Pound is trading sharply lower on Thursday despite a 75-basis point interest rate hike by the Bank of England (BOE). Traders are shrugging off the widely expected move, choosing instead to focus on a sharp rise in Treasury yields, after the Federal Reserve on Wednesday signaled U.S. interest rates will likely peak above where investors currently expect.

At 12:07 GMT, the GBPUSD is trading 1.1241, down 0.01492 or -1.31%.

‘Biggest Rate Rise Since 1989’

The three quarters of a percentage point rate hike by the BOE was its biggest rate rise since 1989, and its eighth consecutive hike to the lending rate.

Despite the aggressive move, policymakers also struck a dovish tone as they looked to temper market expectations for further aggressive monetary policy tightening.

The BOE is not in the same neighborhood as the Fed, given the slowdown in the economy and the dramatic rise in UK government borrowing costs since the summer.

Some analysts feel that the BOE may be out of line raising rates so aggressively especially with a fragile economy.

“We expect the BOE to signal that a larger hike today is unlikely to be the first of a series of larger hikes and that market expectations for further hikes are likely still too aggressive,” MUFG strategist Lee Hardman said.

“It should encourage a weaker pound and reinforce the move lower in cable from overnight,” he added.

More Rate Hikes to Follow

Investors expect the BOE’s Bank Rate to hit 3.5% in December and 4.75% next May – the highest since 2008 though below the peak of around 6% projected during last month’s market turmoil.

Despite the weak economy, the BOE is worried about inflation pressures from a tight labor market and expectations that consumer price inflation will only slowly return to its 2% target, according to Reuters.

Unemployment in the three months to August was the lowest since 1975 at 3.5%, partly due to record numbers of workers quitting the job market, while average wages were 6% higher than the year before, Reuters reported.