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The Bank of England did it, moved interest rates higher by 0.25% pretty much as the markets had been led to expect. Reversing the knee-jerk reaction from last August. Seven out of the nine voting members voted for a rise, two for rates to remain where they were. This was the first time in a decade that the bank raised interest rates. The debating point now will surround, is this a one-off move by the Bank or part of a more sustained period of tightening? The probability in the short term at least is the former not the latter. Sterling fell against both the euro and the US dollar. Ten-year gilt yields also fell. The short end of the yield curve inverted, as yields on the two-year gilt, fell below that of the new current interest rate. That would suggest that the market does not believe that this is a part of a tighter monetary policy going forward.  The Bank of England modestly adjusted their inflation expectations to 2.15% in three years. The FTSE 100 rose in reaction to the fall in sterling.

At the following press conference, the Governor addressed three questions, why now, rational and what is the outlook for rate hike expectations? Mark Carney expressed the view that with the economy running beyond its “speed limit” and inflation above target the decision was a simple one. Mark Carney believes Thursday's action will maintain a positive backdrop for growth and help bring inflation back to target. He also expressed the view that the rise will not have a major impact on borrowers. As for the outlook, he trotted out the expectation that any further rate rises will be gradual, and to a limited extent. They expect two twenty-five basis point rises over the next two years. Despite the view that the economy is running beyond its “speed limit” that did not stop Mr Carney reiterate his concerns, Brexit was having on investment.

The reality is that, despite the headlines this decision will make a limited difference to the economy, 25bpor 50bp is still very low compared to history.

The Federal Reserve also announced their latest rate decision on Wednesday evening and acted in line with expectations and left rates where they were. However, expectations remain that they will move again in December.

Posted on November 3, 2017 .