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The Bank of England lifted UK interest rates by 75 basis points on Thursday, as anticipated, but Governor Andrew Bailey hinted that rates will have to go up in the future by less than currently priced in by markets.
The central bank raised rates to 3.00%. Consensus, as cited by FXStreet, had expected the 0.75 percentage point hike from the central bank.
Five minutes before the decision, the pound was trading at $1.1256, before dropping to $1.1201 as the announcement was made. Sterling has dropped further since, trading at $1.1173 at 1330 GMT on Thursday afternoon.
A majority of Monetary Policy Committee members backed the increase, with only two members voting for smaller increases of 50 basis points and 25 points.
Swati Dhingra preferred to increase the bank rate by 0.50 percentage point, to 2.75%, and Silvana Tenreyro wanted to increase the bank rate by 0.25 percentage point, to 2.5%.
In the October meeting of the MPC, Tenreyro had voted with the majority and supported the enacted 50-basis-point hike, while Dhingra had been alone in preferring a 25 point rise.
The BoE explained that with the labour market remaining tight, and cost and price pressures being elevated, a further, more forceful response from monetary policy was "justified".
In remarks made during the subsequent Monetary Policy Report press conference, BoE Governor Andrew Bailey said: "If we do not act forcefully now, it will be worse later on."
He predicted that inflation will begin to fall back from the middle of next year, but said the bank rate may have to go up "further over the coming months" to ensure that happens.
The central bank said it expects UK consumer price inflation to slow early next year after peaking at 11% in the fourth quarter of this year. It noted that peak rate is lower than previously anticipated, due to UK government plans to hold down energy prices.
"There had been continuing signs of firmer inflation in domestic prices and wages that could indicate greater persistence," the bank added.
Bailey said he could make "no promises" about future interest rates but added that, "based on where we stand today", the central bank thinks bank rate will have to go up by "less than currently priced into financial markets."
The majority of the committee judged that, should the economy evolve broadly in line with the latest Monetary Policy Report projections, further increases in the bank rate "might be required" for a sustainable return of inflation to target.
"If I can put this simply," Bailey said, "yes we project a steep fall in inflation, but there are substantial upside risks to that path."
The decision comes a day after the Federal Reserve lifted US interest rates by 75 basis points, as expected, taking the range for the federal funds rate to 3.75% to 4.00%, from 3.00% to 3.25%.
Wednesday's was the US central bank's fourth 75-point rate hike in a row.
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