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Bank of England raises rates but the pound tumbles on Carney's gloomy analysis

The pound fell sharply on Thursday after the most gentle interest rate hike possible as markets took fright at the Bank of England’s pessimistic growth forecasts and Mark Carney’s indication that rates will rise extremely gradually in the years ahead.
Mr Carney raised rates from 0.25pc to 0.5pc in the first upward move for more than a decade – and he hinted rates would rise twice more in the next three years, as his forecasts are based on rates edging up to 1pc by the end of 2020.
The move is designed to keep a lid on price rises, bringing down inflation from 3pc now to 2.1pc in 2020.
But markets were disappointed with the announcement, as the progress of rate rises is exceptionally slow and it is based on a relatively gloomy growth outlook.
Mr Carney said: “The pace at which the economy can grow without generating inflationary pressures has fallen relative to pre-crisis norms. This reflects persistent weakness in productivity growth since the crisis and, more recently, the more limited availability of labour.”
This has also been exacerbated by the Brexit vote, he believes.
“Uncertainties associated with Brexit are weighing on domestic activity, which has slowed even as global growth has risen significantly,” he said.
“And Brexit-related constraints on investment and labour supply appear to be reinforcing the marked slowdown that has been evident in recent years in the rate at which the economy can grow without generating inflationary pressures.”
As a result the nine-strong Monetary Policy Committee said “any future increases in the Bank Rate would be expected to be at a gradual pace and to a limited extent". 
[img]http://17909.cdx.c.ooyala.com/xqZ3k4ZDE6mkp1ayNuiYcXktcvZ6r1Hp/promo333898791" alt="Bank of England Governor Mark Carney explains interest rate rise"/>
Bank of England Governor Mark Carney explains interest rate rise
02:17
The pound fell 1.8pc against the euro and 1.5pc against the dollar.
Economist Dominic Bryant said “reduced confidence in the UK economy’s long-term prospects” is the likely culprit.
Commerzbank’s Peter Dixon believes the pound fell “because markets were expecting a more hawkish message, but with Brexit-related uncertainty continuing to dominate the economic outlook, the BoE has no choice but to proceed cautiously". 
The Bank of England raised its growth forecast for 2017 to 1.5pc, up from earlier predictions that GDP would rise by 1.5pc.
The pound endured its worst day against the euro since the EU referendum

Credit:
Bloomberg
But for the foreseeable future, GDP will only rise at 1.7pc per year  below the UK’s longer-term average of more than 2pc.
Unemployment should fall to 4.2pc by the end of this year and stay there for the years to come, while pay should rise by 3pc next year and 3.25pc per year after that.
Mr Carney said the rate rise should encourage households to save by pushing up interest rates while also gradually pushing up mortgage costs for borrowers, reducing some of the pressure in the economy.
“With unemployment at a 42 year low, inflation running above target and growth just above its new, lower speed limit, the time has come to ease our foot off the accelerator,” Mr Carney said.
“That will help bring inflation back towards its 2pc target, while still supporting jobs and growth.”
Mr Carney was joined by six other members of the Monetary Policy Committee in voting for a rate rise, but two others voted to keep rates on hold.
One of Mr Carney's deputy Governors, Sir Jon Cunliffe, voted to hold rates as did MPC newcomer Sir Dave Ramsden, who joined the Bank from the Treasury.
[img]http://www.telegraph.co.uk/content/dam/investing/2016/02/18/PX4580371_jm_joncu_2957473b_trans_NvBQzQNjv4BqgsaO8O78rhmZrDxTlQBjdFFzWR4-8YeYq5da7xdvRAs.jpg[/img]

Sir Jon Cunliffe was one of two voters against a hike
That is in part because inflation so far has been driven upwards largely by the fall in the pound, and not by underlying factors in the UK economy domestically.
"These members felt that there was insufficient evidence so far that domestic costs, in particular wage growth, would pick up in line with the Inflation Report's central projection," the minutes said.
The two believe pay growth may stay low as unemployment falls while productivity could pick up a little more, easing inflationary pressures.
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