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BoE raises rates, a follow-up unlikely anytime soon, says Royal Bank of Canada

The Bank of England voted 7-2 to raise their policy rate in November, the first 25 basis points increase in a decade. The move undid last year’s rate cut that followed the Brexit referendum. With the economy operating near capacity—the unemployment rate of 4.3 percent is below estimates of its longer-run level—the central bank had been signaling it might soon be appropriate to withdraw some stimulus, Royal Bank of Canada reported.

That view was reinforced by an upside surprise in GDP, with growth picking up to 0.4 percent in Q3 from 0.3 percent in each of the prior two quarters. While Brexit uncertainty continued to weigh on the economy, a strengthening industrial sector, particularly manufacturing activity, helped lift growth in the latest quarter.

The Bank of England’s November move was seen as a dovish hike with Sterling falling 1 percent after the announcement. The market reaction can be attributed to the BoE’s forward guidance, which indicates any further moves will be gradual and “to a limited extent.” They also dropped an earlier reference to markets under-pricing future tightening. And policymakers were a bit more explicit in their concerns about Brexit, which is weighing on domestic activity and constraining investment and labor supply.

"With little progress in negotiations thus far, we remain of the view that Brexit risks will keep the BoE cautious in removing accommodation, even as inflation remains above target and the economy near capacity. We don’t see any follow up to November’s rate hike next year," the report said.

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