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Sterling, Bond Yields Tumble on BOE Rate Rise

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11/02/2017 | 02:09pm CEST
By Christopher Whittall, Mike Bird and Riva Gold 

The British pound slid sharply and bond yield fell after the Bank of England raised interest rates for the first time in over a decade but signaled that further increases aren't imminent.

The BOE's rate-setting committee voted by a margin of seven votes to two to raise its main policy rate from 0.25% to 0.5%, in a widely expected policy shift.

That still triggered a sharp market reaction, with sterling weakening and bond yields falling -- moves that are usually consistent with expectations that the central bank won't rush to raise interest rates further.

Despite the symbolic significance of the BOE's rate rise, this will be a very shallow and gradual tightening cycle, said Jeremy Lawson, chief economist at Aberdeen Standard Investments.

The pound was trading down by 1.3% against the euro after the announcement at EUR1.266, returning to lows recorded last week. Against the dollar, sterling was down by 0.9% at $1.313. The yield on 10-year U.K. government debt fell around 0.06 percentage point to 1.288%, according to Tradeweb. Yields fall as prices rise.

The Bank of England didn't include its guidance from September that interest rates may need to rise by more than market participants expect in its statement. It also said that its outlook for inflation and economic activity were broadly similar to its last projections in August.

"Markets seem to be reacting to the fact that the BOE has displayed quite a conservative outlook for the U.K. economy," said Viraj Patel, foreign-exchange strategist at ING Bank.

But he added that he believes that the pound is still more likely to appreciate than fall from here.

"It doesn't seem like they're giving a 'one and done' signal on interest rates," Mr. Patel added. "From my point of view I'll be buying this dip basically."

Currencies typically decline when investors expect interest rates to remain low, as they shift their investments toward those that offer higher yields. Moves in bond yields tend to be heavily linked to short-term interest rates.

The export-heavy FTSE 100 was up 0.6%. Some of the FTSE 100 companies who generate the greatest share of revenues overseas climbed after the announcement as the pound fell, with British American Tobacco up 1.5%, Shire up 1.1% and Standard Chartered up 1.6%.

The FTSE Small Cap index of smaller U.K. companies was flat while the FTSE 250 index edged up just 0.1%, compared with a 0.6% climb for the export-heavy FTSE 100.

Shares of U.K. lenders were mixed following the announcement, with more internationally-focused banks outperforming because of currency benefits and the fact that higher rates ahead tend to boost banks' lending income. Shares of U.K.-focused lenders Royal Bank of Scotland Group and Lloyds Banking Group were down around 1.4% each, while Barclays, HSBC Holdings and Standard Chartered all traded higher.

The gains in British equity indexes ran against the course of falling shares across Europe. The Stoxx Europe 600 was down 0.4% midway through the European session.

Write to Christopher Whittall at christopher.whittall@wsj.com, Mike Bird at Mike.Bird@wsj.com and Riva Gold at riva.gold@wsj.com

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