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The British pound falls 2% against the dollar after a decline warning from the Bank of England

LONDON — The British pound fell on Thursday towards American dollar after the Bank of England said it expected a recession to last throughout 2023 and the first half of 2024.

Sterling traded at $1[ads1].1162 at 13:20 London time, the lowest level since October 21, after starting the session at $1.1418 and falling through the morning.

It came as the Bank of England raised interest rates by 75 basis points to 3% in its biggest single hike in 33 years.

But it also said it expected rates to peak at a lower level than what is now priced into financial markets, which is around 4.6%.

“The majority of the committee considers that if the economy were to develop broadly in line with the projections from the latest monetary policy reports, further increases in the bank rate may be necessary for a sustainable return of inflation to the target, albeit at a peak lower than priced into finance. markets, says the statement.

BOE Governor Andrew Bailey said at a press conference after the announcement that it was “important because it means, for example, that interest rates on new fixed-term mortgages will not have to rise as they have.”

The pound has been rocked over the past month by instability in UK financial markets and political unrest.

It hit a record low against the dollar below $1.10 in September, and analysts have warned it remains vulnerable.

“This is not the first time GBP has fallen in response to a BoE rate hike this year,” Jane Foley, head of currency strategy at Dutch bank Rabobank, said in an emailed statement.

“In May, the pound moved lower after an expected 25bps rate hike, and in August the pound fell after the Bank raised interest rates but also warned of a 5-quarter recession starting in Q4 2022.”

“On the UK economy, the Bank’s staff expect GDP to fall by 0.5% in Q3 2022, 0.9 percentage points weaker than expected in the August monetary policy report.”

“Crucially, the Bank also warned that the move higher in interest rates will be ‘at a peak lower than priced into the financial markets’. So there was very little from the Bank to prevent the GBP from moving lower.”

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