The pound was catapulted 0.7% higher against the dollar on Thursday, breaking through the 1.33 resistance level for the first time since the end of November following a shock announcement by the Bank of England (BoE).
The BoE blindsided market participants on Thursday by raising interest rates for the first time in more than three years – with just one member of its nine-strong Monetary Policy Committee voting for rates to remain unchanged. In doing so, it became the world’s first major central bank to raise the cost of borrowing since the pandemic battered the global economy.
The surprise decision to hike the UK’s main interest rate to 0.25% from a historic low 0.1% was made despite fears the Omicron coronavirus variant could strangle the economy by restricting the nation’s spending power.
Instead, the BoE chose to focus on curbing inflation pressures, which is forecast to hit 6% in April – three times above its policy target.
BoE Governor Andrew Bailey said: “We’re concerned about inflation in the medium term. And we’re seeing things now that can threaten that. So that’s why we have to act,”
A closely watched survey released on Thursday morning provided a reminder that the economic impact of the pandemic can’t be ignored for long.
The flash purchasing managers’ index (PMI) – a gauge of the health of the British economy – crumbled to a 10-month low 53.2 in December, down from 57.6 last month, according to IHS Markit and the Chartered Institute of Procurement and Supply.
The PMI for the UK’s all-important services sector plummeted to 53.2 in December, down from 58.5 in November.
According to Chris Williamson, chief business economist at IHS Markit, the PMI underlines “the UK economy being hit once again by Covid 19, with growth slowing sharply at the end of the year led by a steep drop in spending on services by households.”
Retail sales increased by a stronger-than-expected 1.4% in November, taking them 4.7% higher than 12-months earlier, the Office for National Statistics said on Friday morning.
Economists had on average forecast that sales would rise by 0.8% on the month and be 4.2% higher than a year earlier.
Dollar declines after Fed decision
The dollar retreated on Thursday after the US Federal Reserve decided to end its pandemic-era bond purchases in March.
Having made the move on Wednesday to step up the tapering of its asset purchases, the rate-setting Federal Open market Committee noted that “job gains have been solid in recent months, and the unemployment rate has declined substantially.”
Data published by the Labour Department on Thursday showed jobless claims were higher than expected last week, having dropped to their lowest level since 1969.
Initial filings for unemployment insurance for the week ended 11 December totalled 206,000, exceeding the 195,000 forecast by economists.
The quarterly bulletin is released by the BoE today, which provides commentary on market developments and UK monetary policy operations.
Member of the Board of Governors of the Federal Reserve system, Christopher J. Waller is scheduled to make a speech today.