November 2, 2017 / 12:19 PM / a year ago

CORRECTED-Sterling skids, FTSE jumps after BoE "dovish" rate hike

(Corrects time in 3rd paragraph to GMT from BST)

LONDON, Nov 2 (Reuters) - Sterling tumbled around 1 percent on Thursday and Britain’s main FTSE 100 stock index jumped after the Bank of England raised interest rates for the first time in more than a decade but said it sees only gradual rises ahead.

The BoE said its nine rate-setters voted 7-2 to increase its benchmark Bank Rate to 0.50 percent from 0.25 percent, but it expected only “very gradual” further increases would be needed over the next three years.

The pound initially rose on the announcement, climbing to as high as $1.3279, up from around $1.3215 beforehand. But it fell almost 2 U.S. cents in the minutes that followed, slipping below $1.31 by 1215 GMT, down 0.9 percent on the day.

Short sterling interest rate futures shot higher by around 5 ticks across 2018 and 2019 contracts, indicating a shallower path for future interest rate rises.

“They’ve erred on the dovish side as far as the comments are concerned. We have to wait for the press conference but there’s nothing in the initial comments that suggest we should expect another rate hike in the next twelve months,” said OANDA analyst Craig Erlam.

Against the euro, sterling fell as much as 1.4 percent, trading at 89 pence against the single currency for the first time in a week, putting the pound on track for its biggest one-day fall against the euro in 3-1/2 months.

Britain’s FTSE 100 rose sharply, last up 0.6 percent, while mid-caps hit a session high, up 0.1 percent. UK banks climbed to a session high before falling back, last up 0.1 percentt.

Europe’s STOXX 600 on the other hand sank to a day’s low, last down 0.3 percent, while the pan-European banks index fell 0.2 percent.

British government bond yields fell sharply. The 10-year yield dropped by 5 basis points and touched its lowest level in two weeks at 1.288 percent. (Reporting by Jemima Kelly, Saikat Chatterjee, Helen Reid and Andy Bruce; Editing by Abhinav Ramnarayan)

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