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The Bank of England raised interest rates today and tried to send the message that if you look at their forecasts three years out on the basis of market expectations for interest rates before today's announcement, then that gets inflation back towards but not quite down to the Bank of England's target of 2%. Now before today, markets have been expecting maybe two more rate rises over the next couple of years. So the Bank of England was trying to send the message that if anything markets should be expecting a little bit more than those two rate rises over the next two years for them to be back on track with our inflation target.
Sterling fell in value following the bank's announcement today. And that suggests that the market sort is quite a dovish signal compared to what they've been expecting before the announcement was made. In other words, they seemed to be thinking this is one and done and that there won't be another rate hike for some time to come now. That is rather different from what the Bank of England officials thought they were sending as a message today. And it will be interesting to see what those two expectations come more back in line with each other.
And GDP grows modestly over the next years at a rate just above its reduced rate.
One thing that those who've argued against a rate rise have pointed to is the fact that growth in the UK slowed this year and remains pretty sluggish by historical standards. And yet, the Bank of England are choosing to raise interest rates. What the Bank of England point to is the fact that the UK can expect in future to grow much less slowly than we've been used to in the past. There's much less scope to increase the number of people who are in work.
Productivity growth remains very weak by historic standards. So the bank is trying to get across the message that although growth looks weak by historic standards, actually this is all the UK can really expect in future. And therefore, we need to raise rates when growth looks like this.
