Sterling dropped sharply against the U.S. dollar Thursday after the Bank of England (BOE) announced the first rate hike since the financial crisis, but said any subsequent rises would be gradual.
The pound was on track for its biggest one-day fall against the dollar in nearly five months, trading at $1.3103 at about 1:45 p.m. London time. The currency was close to $1.322 just before the rate decision. It was down by more than 1 percent against the greenback for the session.
Traders had largely priced in a rate hike before the announcement, and the sharp move lower was seen as being due to the dovish language from the BOE's statement.
Rate hikes traditionally boost the price of a currency as they lead to better yields for assets denominated in that currency — and thus more inflows from investors.
The Bank of England announced a 25 basis points hike to 0.5 percent with seven of its members voting for the move. The bank said that any future increases should be "gradual" and to a "limited extent."
"The sell on the fact reaction experienced by the pound signals that the market was expecting a more hawkish set of minutes," Jane Foley, head of forex strategy at Rabobank, told CNBC via email.
"For now these minutes support the 'one (hike) and done' view," she added.
John Hardy, head of forex strategy at Saxo Bank, also said via email that the BOE opted for a "dovish hike".
During the press conference, Carney told reporters that the recalibration policy was not clear and could go either way. In particular, the Bank faces a cloud of uncertainty regarding Brexit, which has been pressuring sterling since the vote took place last year.
Carney stressed that rates would "gently" rise as inflation eases in the foreseeable future. The central bank expects the inflation rate to have peaked at 3.2 percent in October — and will be at 3 percent for the year as a whole. The bank had previously said that inflation would be 2.8 percent for 2017.
However, some analysts believe the BOE will see a surprise in inflation figures. Samuel Tombs, chief U.K. economist at Pantheon Macro, said in a note: "Just as the Committee was caught out by how quickly sterling's depreciation boosted inflation, so it looks vulnerable to underestimating how quickly the import price shock will fade. We think it will be another 12 months before Bank rate rises again, about six months longer than markets expected before this meeting," he added.
Correction: The headline of this article has been updated to reflect that the Bank of England signaled a gradual tightening phase.