Bank of England raises the base rate for the first time in over a decade

As the Bank of England raises the base rate, our trusted foreign exchange (FX) specialist partner, Argentex, discusses how it will impact the FX market.

The Bank of England (BoE) matched market expectations yesterday and increased the UK’s base rate by 0.25%, bringing the base rate up to 0.5%. The voting pattern came out more aggressively than forecast, with a 7 – 2 split of the members of the committee voting for a rate hike. Both seemingly GBP positive news.

You would imagine that Sterling would jump up on this news, however the opposite happened. GBP/EUR lost nearly 2%, while GBP/USD dropped even more. The reason for this was because the outlook for the inflation rate moving into 2018 and 2019 was downgraded, leading the market to digest the release as a signal the UK base rate trajectory would be limited. The Bank expect inflation to peak at 3.2% in October, up from 3%, but stated the worst of the real income squeeze is ending.

BoE Governor, Mark Carney, stated in the press conference that the Bank expected the UK economy to grow at about 1.7% for the next few years, which he said would require “about two more interest rate increases over the next three years”.

This was not seen as a positive enough response, and GBP fell sharply post the release and continued to drift throughout the afternoon. The Governor stated the rate rise is more about “easing our foot off the accelerator”, than a significant tightening in policy. “This is a modest adjustment on interest rates,” which did little to boost the Pound.

The fall in Sterling yesterday has large implications for individuals purchasing property overseas. The extra cost of yesterday’s announcement for a client purchasing a property in Europe for €500,000 yesterday would be almost £10,000. Argentex has a team of dealers, each with over 10 years of experience in theFX markets, their job is to work closely with their clients to try and achieve the best rate possible and avoid any negative news affecting the purchase price.